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Explain an inverted yield curve using the pure expectations theory.
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- Please explain why this statement is (False). The unbiased expectations hypothesis of the term structure posits that long-term interest rates are unrelated to expected future short-term rates.Briefly outline how each of the following theories explain the shape of the yield curve.A. Liquidity preference theoryB. Expectations theoryC. Preferred habitat theoryD. Market segmentation theoryThe unbiased expectation theory and liquidity premium theory are two important theories to explain the shape of yield curve. Discuss and compare the two theories
- One-year Treasury securities yield 5 percent, 2-year Treasury securities yield 5.5 percent, and 3-year Treasury securities yield 6 percent. Assume that the expectations theory holds. What does the market expect will be the yield on 1-year Treasury securities two years from now?Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years: 5%, 6%, 7%, 6% and 5%.As the economy moves through a business cycle, which of the following term structure of interest rates theories describe the shape of the yield curve? a)Expectations theory, agency theory and segmentation theory. b)Market segmentation theory, agency theory and liquidity premium theory. c)Liquidity preference theory, segmentation theory and agency theory. d)Liquidity premium theory, segmentation theory and expectation hypothesis.
- What might the yield curve indicate about the market’s predictions about the inflation rate in the future?Explain the advantages and disadvantages of monetary policy and macroprudential policy in dealing with asset price bubbles.Why are inflation expectations so important to modern monetary policy? What are several ways that central banks try to manage inflation expectations?
- Is expansionary monetary policy responsible for the historically low real and nominal interest rates of 2008–2016? Why or why not?Outline the ways in which FED easing affects the yield curve (include the theories of the yield curve as part of this). Is it possible for an increase in the real money supply (FED easing) to have exactly the opposite effect? Explain the basis for why this is or is not possible.