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Which of the following statements is consistent with an upward-sloping yield curve?
A. The risk of borrowers defaulting on their loans increases with the duration of the lending.
B. Liquidity preference theory implies that short-term interest rates contain a premium over long-term interest rates to compensate for lost liquidity.
C. Banks are reluctant to lend short-term, while government debt repayments have significantly increased the amount of long-term funds available.
D. The government has increased short-term interest rates in order to combat rising inflation in the economy
Answer : A
Hi sir, i have watched your video for this topic but i would like to ask regarding this question, i have understand for the point A, B and D. But i still confused for point C why it is false? I cannot think the reason for it to be false and relate it to the upward sloping yield curve, i hope you can clarify it to me, thank you so much in advance sir 🙂
If banks are reluctant to lend short-term then they will charge higher interest for short term lending.
If there are more long-term funds available then long-term interest rates will fall.
As a result the yield curve is more likely to be downward sloping.
thank you so much sir for your clear and helpful explanation, have a nice day 🙂
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