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.

A. increase
B. decrease
C. not change
D. change in an unpredictable manner

Answer 1

The correct answer is B

Step-by-step explanation:

Expectations theory of the term structure of the interest rates defines that the yield on the assets which have the different maturities are primarily related with the expectations of the market of the future yields.

And if the yield curve is downward sloping, it means that there is expectation of the lower interest rates in the future, so it will show that the investors will expect short term interest rates to reduce or decrease in the future.