Final answer:
The downward-sloping yield curve suggests investors expect a decrease in short-term interest rates. An expected appreciation of a currency can decrease yields, as investors will accept lower interest rates for a currency gaining value. In the financial market, an increase in money supply typically leads to lower interest rates.
Step-by-step explanation:
The Expectations Theory of the term structure of interest rates posits that a downward-sloping yield curve indicates that investors expect short-term interest rates to decrease in the future. Investors interpret the lower long-term yields as a sign that interest rates will fall, which is why they are willing to lock in lower rates now for the future.
When a country's currency is expected to appreciate in value, it tends to have an impact on expected exchange rates and yields. If investors believe that a currency will be stronger in the future, the demand for that currency increases as they anticipate that they will receive more value in the future. This increased demand can result in a decrease in yields, as investors are willing to accept lower interest rates in exchange for holding a currency they expect to appreciate.
Regarding the financial market, a rise in supply of money generally leads to a decline in interest rates, as more funds are available for lending. This means that option (a rise in supply) is the condition that would likely lead to a decline in interest rates out of the given choices.