What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?
A)Investors expect long-term interest rates to rise in the future.
B)Investors expect future short-term interest rates to be lower than the current short-term interest rate.
C)Investors expect future short-term interest rates to be the same as the current short-term interest rate.
D)Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Question

Quizplus · Accepted Answer

A downward-sloping yield curve, according to the expectations theory, suggests that investors anticipate future short-term interest rates to be lower than the current rates. This expectation leads to higher demand for long-term securities, pushing their yields down relative to short-term securities.

What Does a Downward-Sloping Yield Curve Imply, According to the Expectations