Final answer:
The expectations hypothesis is assumed when estimating forward rates from the spot rate curve, indicating that future interest rates influence the yield curve's shape. In the financial market, a rise in supply leads to a decline in interest rates. Changes such as an increase in home buyers or economic confidence can raise demand and interest rates, while banks facing higher defaults may constrain supply and increase rates.
Step-by-step explanation:
When estimating forward rates from the spot rate curve, it is assumed that the c. expectations hypothesis accurately describes the shape of the yield curve. The expectations hypothesis proposes that the shape of the yield curve reflects the market's expectations of future interest rates. If investors expect rates to rise, the yield curve will slope upward; conversely, if rates are expected to fall, the curve will slope downward.
Regarding the financial market question, a rise in the supply of funds (c) will generally lead to a decline in interest rates, as supply and demand economics dictate that increased supply, with demand holding steady, will result in downward pressure on the price, which in this case, is the interest rate.
In economic scenarios affecting the market for home loans, an increase in the number of home-buying age individuals is presumed to increase demand, thereby pushing the equilibrium interest rate and quantity of home loans up. When confidence grows in economic and job stability, it also elevates the demand, again leading to higher equilibrium prices and quantities. However, if banks experience a higher rate of non-repayment, the supply might be reduced due to higher risk, leading to higher interest rates but a lower quantity of home loans.