4. Assume that the term premium is 0 and the expectations theory of the term structure is the correct framework. You observe that the interest rate on a 1-year Treasury 1 security is 2%, and the interest rate on a 2-year Treasury security is 4%. What is the market's expectation for 1-year interest rates next year? What does this say about the market's expectations for the future state of the economy?
4. Assume that the term premium is 0 and the expectations theory of the term structure is the correct framework. You observe that the interest rate on a 1-year Treasury 1 security is 2%, and the interest rate on a 2-year Treasury security is 4%. What is the market's expectation for 1-year interest rates next year? What does this say about the market's expectations for the future state of the economy?
Chapter13: Monetary Policy: Conventional And Unconventional
Section: Chapter Questions
Problem 7DQ
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Transcribed Image Text:4. Assume that the term premium is 0 and the expectations theory of the term structure
is the correct framework. You observe that the interest rate on a 1-year Treasury
1
security is 2%, and the interest rate on a 2-year Treasury security is 4%. What is the
market's expectation for 1-year interest rates next year? What does this say about the
market's expectations for the future state of the economy?
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