Question

On May 11, 2020, Federal Reserve Bank of San Francisco (FRBSF) issued an research report titled as
"Coronavirus and the Risk of Deflation". In this report, FRBSF analyzes as below.
“The pandemic caused by COVID-19 represents an unprecedented negative shock to the global economy
that is likely to severely depress economic activity in the near term. The coronavirus shock may reduce
aggregate demand enough to lower the U.S. inflation rate by as much as 2 percentage points. We focus on
the risk of a significant drop in inflation from its current level. To assess this risk, we use yield curve
models of nominal and real government bond yields from four major countries: Canada, France, Japan, and
the United States and general corporate purposes. ”
According to the economy outlook of FRBSF as above, the term structure of interest rates will most likely
be:
A. upward sloping.
B. flat.
C. humped.
D. downward sloping.
E. double-humped.

Answer 1

the term structure of interest rates refers to the yield curve, which shows the relation between interest rates of identical quality bonds at different maturities.

as there is situation of pandemic there is reduction in inflation and increase in deflation on both short term as well as effecting that in long term but that is minimal as many policies are implemented to balance the effect so , there is flatter curve showing that market is unsure regarding the future may have effect but can be balanced or can be changed.

therefore, option b is correct.