Question

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

Answer 1

Answer:

The answer is decrease

Explanation:

Yield curve is a line that plot interest rate against its maturity. Interest rate is on the vertical axis while maturity date is on the horizontal axis.

The slope of the yield curve tells us direction of future short-term interest rates. An upward sloping curve tells us that the investors expect an increase in future interest rates while downward sloping curve indicates expectations of a decrease in interest rates in the future.