Question

When long-term interest rates are higher than short-term rates, as they were in 2010, it:_________.
a. implies that inflation will fall.
b. has no implication for short-term interest rates.
c. implies that short-term interest rates are expected to rise.
d. implies that short-term interest rates are expected to fall.

Answer 1

Answer: c. implies that short-term interest rates are expected to rise.

Explanation:

If long term rates are higher than short term rates, people will expect short term rates to rise so that they may eventually reach the long term rates as time goes on.

This expectation will lead to a rise in short term rates as people take actions that will try to capitalize on the rates rising.