Assume That Inflation Is Expected to Decline Steadily in the Future,but

question 39

Multiple Choice

Assume that inflation is expected to decline steadily in the future,but that the real risk-free rate,r*,will remain constant.Which of the following statements is CORRECT,other things held constant?

• A) If the pure expectations theory holds,the Treasury yield curve must be downward sloping.
• B) If the pure expectations theory holds,the corporate yield curve must be downward sloping.
• C) If there is a positive maturity risk premium,the Treasury yield curve must be upward sloping.
• D) If inflation is expected to decline,there can be no maturity risk premium.
• E) The expectations theory cannot hold if inflation is decreasing.

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