Assuming That the Term Structure of Interest Rates Is Determined

question 17

Multiple Choice

Assuming that the term structure of interest rates is determined as posited by the pure expectations theory,which of the following statements is CORRECT?

• A) In equilibrium,long-term rates must be equal to short-term rates.
• B) An upward-sloping yield curve implies that future short-term rates are expected to decline.
• C) The maturity risk premium is assumed to be zero.
• D) Inflation is expected to be zero.
• E) Consumer prices as measured by an index of inflation are expected to rise at a constant rate.

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Definitions:

Equilibrium Level

A condition in which the supply and demand in the market are equal, leading to stable prices.

Deadweight Loss

Deadweight loss is the loss of economic efficiency that occurs when the equilibrium outcome is not achievable or not achieved in a market.

Price Floor

A minimum price set by the government for certain goods and services, below which they cannot be sold, aimed at protecting producers.

Government Purchases

Expenditures made by the government for goods and services that affect the economy, including investments and spending on infrastructure, healthcare, and education.