According to the Expectations Hypothesis:
A) When short-term interest rates are expected to rise in the future, the long-term interest rates are equal to current short-term interest rates
B) When short-term rates are expected to remain constant in the future, the long-term interest rates are higher than current short-term interest rates
C) Short-term bonds are perfect substitutes for long-term bonds
D) Expectations of future short-term rates equal estimates of current short-term rates

Question

Quizplus · Accepted Answer

The Expectations Hypothesis suggests that short-term bonds are perfect substitutes for long-term bonds, meaning that the yield on a long-term bond is an average of current and expected future short-term interest rates.