Suppose We Observe the Following Rates: ₁R₁ = 12 Percent

question 113

Multiple Choice

Suppose we observe the following rates: ₁R₁ = 12 percent, ₁R₂ = 15 percent. If the unbiased expectations theory of the term structure of interest rates holds, what is the one-year interest rate expected one year from now, E(₂r₁) ?

• A) 13.5 percent
• B) 14.2 percent
• C) 15.6 percent
• D) 18.0 percent

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Definitions:

Output

The quantity of goods or services produced by a firm, industry, or economy within a specified period.

Total Costs

The sum of all expenses a firm incurs in producing a product or offering a service, including both fixed and variable costs.

Total Variable Costs

The sum of all costs that vary with output level, including materials, labor, and other expenses that change with production volume.

Techniques of Production

The methods and processes used by firms to produce goods and services efficiently.