If the Expectations Theory of the Term Structure of Interest

question 14

Multiple Choice

If the expectations theory of the term structure of interest rates is correct, and if the other term structure theories are invalid, and we observe a downward sloping yield curve, which of the following is a true statement?

• A) Investors expect interest rates to be constant over time.
• B) Investors expect interest rates to increase in the future.
• C) Investors expect interest rates to decrease in the future.
• D) Investors require a positive maturity risk premium.
• E) The maturity risk premium must be positive.

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Definitions:

Equilibrium Wage

The wage rate at which the quantity of labor employers are willing to hire equals the quantity workers are willing to supply, with no excess demand or supply.

Quantity Of Labor

The total number of labor hours provided by workers for the production of goods or services.

Labor

Human effort, both physical and mental, used in the production of goods and services.

Efficiency Wage

A higher-than-market wage that a firm pays to increase worker productivity.