Assume That the Expectations Theory of the Term Structure of Interest

question 27

Multiple Choice

Assume that the expectations theory of the term structure of interest rates is correct, and other term structure theories are invalid. If a downward sloping yield curve is observed, which of the following is a correct 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 negative maturity risk premium.
• E)The inflation premium must be greater than 2 percent.

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Definitions:

UCS

An abbreviation commonly used in psychology for "Unconditioned Stimulus," which is a stimulus that naturally triggers a response without the need for prior conditioning.

Fear-Producing Stimulus

An object, event, or situation that induces a fear response in an individual.

"Little Albert" Study

An experiment conducted by John B. Watson and Rosalie Rayner that demonstrated classical conditioning in humans by showing how an infant named Albert became conditioned to fear a white rat.

Conditioned Response

A learned reaction to a conditioned stimulus that occurs because of previous conditioning, as demonstrated in classical conditioning experiments.