A ________ yield curve predicts a future increase in inflation.A) steeply upward slopingB) slight upward slopingC) flatD) downward sloping

Understanding the Yield Curve

1. Definition of a Yield Curve: A yield curve is a graph that shows the relationship between interest rates and the maturity dates of debt securities, often government bonds.

2. Types of Yield Curves:

   • Upward Sloping: Indicates that longer-term securities have higher yields than short-term securities, often predicting economic growth or an increase in inflation.
   • Flat: Suggests that there is little difference between short-term and long-term rates, indicating uncertainty in the economy.
   • Downward Sloping (Inverted): Indicates that short-term yields are higher than long-term yields, often predicting a recession.

Analyzing Options

1. A) Steeply upward sloping: This type suggests that investors expect higher inflation and stronger economic growth in the future.
2. B) Slight upward sloping: Indicates mild expectations of growth and inflation.
3. C) Flat: Reflects uncertainty about future growth and inflation.
4. D) Downward sloping: Typically signals expectations of a recession and lower inflation in the future.

Conclusion

A steeply upward sloping yield curve (Option A) best predicts a future increase in inflation as it signifies that investors expect higher returns on long-term investments due to anticipated inflationary pressures.

Final Answer

A) steeply upward sloping