According to the expectations theory of the term structure of interest rates,
A)a short-term interest rate is equal to the average of current and expected future long-term interest rates.
B)a short-term interest rate has no relation to long-term interest rates.
C)a long-term interest rate is equal to the average of current and expected future short-term interest rates.
D)the yield curve is always flat.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure of interest rates posits that the long-term interest rate is an average of current and expected future short-term interest rates. This theory suggests that the shape of the yield curve reflects market expectations about future interest rates.

According to the Expectations Theory of the Term Structure of Interest