the economics of money, banking, and financial markets

180 $

© 2014 Pearson Canada Inc.$

53. 
    

    A ____ yield curve predicts a future increase in inflation.
    A) steeply upward sloping
    B) slight upward sloping
    C) flat
    D) downward sloping
    Answer: A
    Diff: 1 Type: MC Page Ref: 129
    Skill: Applied
    Objective List: 6.2 Explain how interest rates on bonds with different maturities are related

    
    


54. 
    

    If a higher inflation is expected, what would you expect to happen to the shape of the yield
    curve? Why?
    Answer: The yield curve should have a steep upward slope. Nominal interest rates will increase
    if the inflation rate increases, therefore, bond purchasers will require a higher term premium to
    hold the riskier long-term bond.
    Diff: 1 Type: SA Page Ref: 127 - 128
    Skill: Applied
    Objective List: 6.2 Explain how interest rates on bonds with different maturities are related

    
    


55. 
    

    What is the shape of the yield curve when short rates are expected to fall in the medium term,
    and then increase? Demonstrate this graphically.
    Answer: The curve will have a U shape reflecting the expected fall and then increase.

    
    

Diff: 3 Type: SA Page Ref: 127 - 128
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related