Suppose That Interest Rates Are Expected to Remain Unchanged Over

question 7

Multiple Choice

Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longer-term bonds. According to the liquidity premium theory, the yield curve should be:

• A) upward sloping and very steep.
• B) upward sloping and relatively flat.
• C) inverted.
• D) vertical.

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Definitions:

Marginal Cost Curve

A graphical representation showing how the cost of producing one additional unit of a good or service changes as production volume changes.

Variable Input

Any resource for which the quantity used in production can vary as the level of output changes.

Perfectly Competitive

A market structure where many firms offer products that are similar and entry into the market is relatively free of barriers.

Labor Market

A trading area where job seekers and employers meet, defined by labor supply and demand.