Question

Suppose the expectations hypothesis is true. If the yield curve is flat this means that ________.

		investors do not require a premium for expected inflation
		investors do not expect interest rates to change in the future
		investors expect interest rates to rise in the future
		investors expect interest rates to fall in the future

Answer 1

A flattening in the yield curve is a representative of that investors expects the short term interest rates and long term interest rates to be same and this is a signal if impending recession.

A flattening of yield curve represents that investors donot expect the interest rates to change in the future as economy is expected to contract in the near future.

So my answer would be (B)investors do not expect interest rates to change in the future

Rest of the answers advocates that investors expect the interest rates to rise or fall which is a symbol of inverted or normal yield curve. Flattening of yield curve has not much to do with a recession.