Question 1

-Refer to Figures A, B, and C. According to expectations theory, which of the figures reflects expectations that the short-term interest rate is expected to remain constant in the future but that borrowers and lenders also must be compensated with a liquidity premium for lending long?

Accepted Answer

A)   Figure A
B)   Figure B
C)   Figure C
D)   Both a and b A

Question 2

According to the expectations theory, if the 1-year rate is 2.5% and the 2-year rate is 3.64%, the expected 1-year rate would be

Accepted Answer

A)   3.80%.
B)   4.80%.
C)   5.80%.
D)   6.80%. B

Question 3

-According to expectations theory, which of the figures above reflects expectations of a rise in the interest rate on short-term securities?

Accepted Answer

A)   Figure A
B)   Figure B
C)   Figure C
D)   Both a and b A

Question 4

-Refer to Figures A, B, and C. According to expectations theory, which of the figures best reflects a situation where i?>i???

Accepted Answer

A)   Figure A
B)   Figure B
C)   Figure C
D)   None of the above

Question 5

-Refer to Figures A, B, and C. According to expectations theory, which of the figures is most likely to be associated with expected growth in income, expected increases in prices, and slower growth of money supply?

Accepted Answer

A)   Figure A
B)   Figure B
C)   Figure C
D)   Both a and b

Question 6

According to the expectations theory, if next year's expected short-term rate is below the current short-term rate,

Accepted Answer

A)   the current long-term rate will be below the current short-term rate.
B)   the current long-term rate will be above the current long-term rate.
C)   the current long-term rate will be horizontal.
D)   the current long-term rate will be vertical.

Question 7

-Refer to Figures A, B, and C. According to expectations theory, which of the figures above reflects expectations of a fall in the interest rate on short-term securities?

Accepted Answer