According to the Lucas Critique,if Past Increases in the Short-Term

question 21

Multiple Choice

According to the Lucas critique,if past increases in the short-term interest rate have always been temporary,then

• A)the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate.
• B)the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate.
• C)one cannot predict the term-structure relationship as it depends on expectations.
• D)the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed.

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Definitions:

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