Final answer:
The shape of the yield curve is influenced by monetary and fiscal policies. Stimulative policies typically result in a steep upward-sloping curve, while restrictive policies lead to a flatter curve.
Step-by-step explanation:
The shape of the yield curve reflects the cumulative effects of monetary and fiscal policies on interest rates over various maturities. Here's an analysis of the shapes under different policy combinations:
- Stimulative monetary and stimulative fiscal policies lead to an increased supply of money and higher aggregate demand, respectively. The result is generally a steep upward-sloping yield curve as the expectation of higher inflation and economic expansion in the future leads to higher long-term interest rates compared to short-term rates.
- Restrictive monetary and restrictive fiscal policies reduce the money supply and decrease government spending or increase taxes. This typically results in a flatter yield curve because the expectation of lower inflation and economic slowdown will narrow the difference between short- and long-term interest rates.
Therefore, the correct combination would be Answer A: Stimulative monetary, stimulative fiscal: Steep upward; Restrictive monetary, restrictive fiscal: Flat.