If the Expected Path of One-Year Interest Rates Over the Next

question 90

Multiple Choice

If the expected path of one-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,then the pure expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of

• A) one year.
• B) two years.
• C) three years.
• D) four years.
• E) five years.

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Definitions:

Cardinal Utility Function

Utility function describing by how much one market basket is preferred to another.

Ordinal Utility Function

Utility function that generates a ranking of market baskets in order of most to least preferred.

Budget Line

A graphical representation of all possible combinations of two goods that can be purchased with a given budget and prices.

Slope

The rate at which a line or curve inclines or declines, indicating the steepness.