A Two-Year Interest Rate Is 7% and a One-Year Forward

question 71

Multiple Choice

A two-year interest rate is 7% and a one-year forward rate one year from now is 8%. According to the expectations theory, what is the current one-year rate?

• A) 6.0%
• B) 6.5%
• C) 7.0%
• D) 8.0%
• E) 9.0%

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Definitions:

Marginal Revenue Product

The additional revenue generated by employing one more unit of a factor of production, keeping all other factors constant.

Wage Rate

The amount of money workers are paid per unit of time, usually specified in terms of an hour, representing compensation for labor services.

Employment

The condition of having paid work or being engaged in a productive activity.

Marginal Revenue Product

The additional income produced by one more unit of input, such as labor or capital, in the production process.