Under the Expectations Theory If Market Participants Expect That Future

question 22

Multiple Choice

Under the expectations theory if market participants expect that future short-term rates will be higher than current short-term rates, the yield curve will

• A)slope upward.
• B)slope downward.
• C)be flat.
• D)slope upward, slope downward, or be flat, depending on risk, liquidity, cost of information, and tax considerations.

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Definitions:

Prepaid Expenses

Payments for goods or services that will be received in the future, which are recorded as assets until they are actually used or consumed.

Adjusting Entry

A journal entry made at the end of an accounting period to align the books with the accrual basis of accounting.

Supplies Expense

Costs incurred for office or operational supplies used within a business during a specific accounting period.

Accounts Payable

Liabilities representing amounts owed by a company to creditors for purchases of goods or services on credit, typically due within a short period.