Yield curve studies of the yield spread between long-term and short-term government securities are being used to predict:
A) The probability of a recession
B) The near-term growth in profits
C) The size of government budget deficits
D) Choices A and C only
E) Choices A and B only

Question

Quizplus · Accepted Answer

The yield curve, which plots the yields of short-term to long-term government securities, is a widely used tool to predict economic conditions. A normal yield curve (where long-term rates are higher than short-term rates) suggests economic expansion, while an inverted yield curve (where short-term rates are higher than long-term rates) is often seen as a predictor of economic recession. Therefore, the correct answer is A) The probability of a recession. The yield curve is not directly used to predict near-term growth in profits or the size of government budget deficits.

Yield Curve Studies of the Yield Spread Between Long-Term and Short-Term