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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Definitions:

Degrees of Freedom

The number of independent values or quantities that can be arbitrarily assigned in a statistical calculation, often reflecting the number of values that are free to vary.

Independent Variable

In statistical analysis, a variable presumed to cause or influence the dependent variable without itself being affected by any other variables of interest.

ANOVA

Analysis of Variance, a statistical method used to compare the means of three or more samples to determine if at least one of the sample means significantly differs from the others.

SST

Total Sum of Squares, a measure used in statistical analysis to quantify the variation within a set of observations.