Question

According to the expectations hypothesis, an upward-sloping yield curve implies that the market believes interest rates will rise in the future.

a) True
b) False

Answer 1

When a country's currency is expected to appreciate in value, it typically leads to a decrease in yields. This is because investors expect the currency to strengthen, leading to increased demand. On the other hand, if a currency is expected to depreciate, yields tend to rise.

Step-by-step explanation:

When a country's currency is expected to appreciate in value, it means that the currency is expected to strengthen relative to other currencies. This can have an impact on yields, or the interest rates paid on government bonds, in that country.

An expected appreciation in the currency typically leads to a decrease in yields. This is because when the currency is expected to become stronger, there is increased demand for that currency. As a result, investors are willing to accept lower yields because they expect the value of the currency to increase over time.

Conversely, if a currency is expected to depreciate, or weaken, in value, yields tend to rise. This is because investors are less willing to hold that currency, so higher yields are necessary to compensate for the expected decline in value.