If the Yield Curve Is Flat for Short Maturities and Then

question 72

Multiple Choice

If the yield curve is flat for short maturities and then slopes downward for longer maturities,the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

• A)a rise in short-term interest rates in the near future and a decline further out in the future.
• B)constant short-term interest rates in the near future and a decline further out in the future.
• C)a decline in short-term interest rates in the near future and a rise further out in the future.
• D)a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

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Definitions:

Complements

Goods that are often used together, where the increase in the consumption of one leads to an increase in the consumption of the other.

Demand Curve

A graph showing the relationship between the price of a good or service and the quantity demanded, typically downward sloping.

Consumer Incomes

The total earnings or financial gains received by individuals or households, affecting their buying power and consumption patterns.

Hybrid Sedans

Vehicles that combine an internal combustion engine with an electric propulsion system, designed to reduce reliance on fossil fuels and decrease emissions.