If a yield curve looks like the one shown in figure (b) below, what is the market predicting about the movement of future short-term interest rates? What might the yield curve indicate about the market’s predictions for the inflation rate in thefuture?
Answer to relevant QuestionsWhat effect would reducing income tax rates have on the interest rates of municipal bonds? Would interest rates of Treasury securities be affected, and if so how?Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supple has had a sharp increase in the past week, you should go out and buy stocks? Why or why not?Can we expect the value of the dollar to rise by 2% next week if our expectations are rational? Wealthy people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection?Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities? Why?
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