Question

Downward sloping or flat yield curves often indicate?

1) a recession in the near future.
2) an economic expansion in the near future.
3) higher inflation in the near future.
4) a weaker dollar in the foreign exchange markets.

Answer 1

Downward sloping or flat yield curves are typically indicators of a potential recession looming in the near future, as per market expectations of economic slowdown and consequent lower interest rates.

Step-by-step explanation:

Downward-sloping or flat yield curves often indicate a recession in the near future. This is a phenomenon in the bond market where longer-term debt instruments have a lower yield than short-term debt instruments, which can suggest that investors expect the economy to slow down, leading to lower interest rates in the future. This expectation of economic contraction aligns with the Phillips curve concept, which in the short run shows an inverse relationship between unemployment and inflation, implying that lower inflation often comes with higher unemployment. Moreover, Keynesian macroeconomics suggests that in such scenarios, the appropriate response would be expansionary fiscal policy to stimulate the economy.