1. If inflation becomes expected, and all other things remain as they were, the

Question

1. If inflation becomes expected, and all other things remain as they were, the yield curve would most likely become:

a) steeper.

b) flatter

c) flat.

d) vertical.

2. Suppose you are a borrower and you expect inflation to be 6 percent over the next year because inflation was 6 percent in the last year. If you do not want to pay more than 2 percent in real terms for any loan you take out, you will not borrow if the interest rate is greater than:

a) 2 percent.

b) 6 percent.

c) 8 percent.

d) 30 percent.

Explanation / Answer

Q1. Option a)

With the increase in expected inflation, the yeild curve becomes steeper as the expectations increases in order to meet cost of inflation

Q2. Option c)

Interest rate - Inflation = 8-6 = 2%

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