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- A “normal” yield curve is upward sloping because investors expect Select one: A. Lower interest rates in the future due to an expanding economy B. Lower interest rates in the future due to a contracting economy C. Higher interest rates in the future due to a contracting economy D. Higher interest rates in the future due to an expanding economyAn inverted yield curve predicts that short-term interest rates a. are expected to rise in the future. b. will rise and then fall in the future. c. will remain unchanged in the future. d. will fall in the future. e. None of the aboveOutline 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.
- 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?What does a steep upward sloping yield curve indicate? You determining your answer keep in mind the Fisher equation: i=r+π^e i=r+π^e, where i is the nominal interest rate, r is the real interest rate and π^e is r the expected inflation rate. Group of answer choices higher short term expected inflation higher long-term expected inflation lower long-term expected inflation random changes in expected inflationAs 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.
- The unbiased expectation theory and liquidity premium theory are two important theories to explain the shape of yield curve. Discuss and compare the two theoriesSuppose that at the end of 2022 the one-year interest rate was 9.75% and the two-year interest rate was 10.5%. How can this yield curve be interpreted? Calculate the expected short-term interest rate at the end of 2023.What are the key factors that most affect the level and shape of the yield curve?View Solution:
- Suppose the interest rate rises. Using both the supply and demand for bonds and the liquidity preference frameworks, discuss whether this event is likely to reflect good economic news or is a sign of trouble: Show graphically the effect of a rise in expected inflation on interest rates in the bond market.An increase in the expected rate of inflation will the expected return on bonds relative to the that on real assets, and shift the curve to the .
