If the Expectations Theory of the Term Structure of Interest

question 6

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 short-term rates to be constant over time.
• B) Investors expect short-term rates to increase in the future.
• C) Investors expect short-term rates to decrease in the future.
• D) It is impossible to say unless we know whether investors require a positive or negative maturity risk premium.
• E) The maturity risk premium must be positive.

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Definitions:

Wage Determination

The process through which wages for work are established, often influenced by factors such as labor supply and demand, bargaining power, and government policy.

Developing Countries

Nations with a lower level of material well-being, industrialization, and economic development, often characterized by lower incomes and less stable economic conditions.

Capital

Assets used for the production of goods and services, such as buildings, machinery, and equipment.

Purchase Price

The amount of money that is paid to buy a good, service, or asset.