What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?
A)Investors expect long-term interest rates to fall 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

According to the expectations theory of the term structure of interest rates, an upward-sloping yield curve implies that investors expect future short-term interest rates to be higher than the current short-term interest rate. This is because long-term interest rates are typically a compilation of the current short-term interest rate plus expectations about future short-term interest rates. Therefore, if the yield curve is upward sloping, it suggests that investors expect future short-term interest rates to rise, leading to higher long-term interest rates.

What Does an Upward-Sloping Yield Curve Imply, According to the Expectations