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(a) Imagine that the yield curve is currently flat. The Treasury announces that they will no longer issue
(a) Imagine that the yield curve is currently flat. The Treasury announces that they will no longer issue
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securities with maturities longer than two years. As a result, long-term government bonds will be refinanced using only relatively short-term debt. If the “market segmentation theory” of the yield curve is correct, what will happen to the slope of the yield curve as a result of this policy change? Explain briefly. (b) True, False, or Uncertain and Explain. According to the “liquidity preference theory” of the yield curve, if the yield curve is flat, rates investors expect to be available in the future are the same as current rates
