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

question 21

Multiple Choice

If the expected path of one-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the pure expectations theory predicts that today's interest rate on the four-year bond is

• A) 1 percent.
• B) 2 percent.
• C) 4 percent.
• D) none of the above.

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Definitions:

Endorsing

The act of giving public approval or support to something or someone.

Cognitive Dissonance Theory

The psychological conflict resulting from incongruous beliefs and attitudes held simultaneously, leading to a state of mental discomfort that individuals strive to reduce.

Self-Serving Bias

A common tendency for people to attribute positive outcomes to their own character but attribute negative outcomes to external factors.

Fundamental Attribution Error

The tendency to overemphasize personality traits and underestimate situational influences when explaining others' behavior.