Suppose the Yield Curve Is Initially Horizontal

question 45

Multiple Choice

Suppose the yield curve is initially horizontal.Suppose the current one-year interest rate increases by 4% while the expected future one-year interest rate does not change.Which of the following will tend to occur?

• A)i2t will increase by 4%
• B)i2t will increase by 2%
• C)i2t will increase by less than 2%
• D)i2t will decrease by 2%

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Definitions:

Owner's Capital Account

An equity account representing the total investment of the owner in the business, including initial contributions and subsequent earnings, minus any withdrawals.

Asset Account

Accounts used in accounting to track the value of economic resources owned or controlled by an entity which can provide future benefits.

Trial Balance

A report that lists the balances of all ledger accounts at a specific point in time, used to verify the equality of debits and credits.

Debit Column

The left-hand column in an account or financial statement where debits are recorded, typically representing increases in assets or expenses and decreases in liabilities or equity.