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hi, i couldnt understand the explanation given for the following question from kaplan
which of the following would NOT be a possible explanation for the normal yield curve observed?
A. expectations theory
B. liquidity preference theory
C. market segmentation theory
D. an expected rise in interestthe answer is C.
the explanation given by kaplan was “market segmentation helps explain any ‘wiggle’ on the yield curve rather than why it might be normal instead of inverted.”
what do they mean by ‘wiggle’ and why does it only explain the ‘wiggle’?also, does the answer for D also mean expectations theory?
You don’t need to learn the actual word ‘wiggle’, but it just means a sudden shift in the shape of the yield curve (as illustrated on Page 15 of our free lecture notes and the lecture that go with it).
And yes – expectations theory does refer to expected changes in the interest rate.
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