Assume that inflation is expected to decline steadily in the future, but that th
ID: 2622104 • Letter: A
Question
Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? a. If the pure expectations theory holds, the Treasury yield curve must be downward sloping. b. The expectations theory cannot hold if inflation is decreasing. c. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping. d. If the pure expectations theory holds, the corporate yield curve must be downward sloping. e. If inflation is expected to decline, there can be no maturity risk premium.
Explanation / Answer
A
If the pure expectations theory holds, the Treasury yield curve must be downward sloping