Question

THIS QUOLIUIT. PL TOOL TOT COMIC) ППочити, то гро розіре Study the table on the right. Which of the following could explain why the long-term rate was higher than the short-term rate in 1993 but lower in 1980. The following table gives three key U.S. interest rates in 1980 and again in April 1993: Three-month U.S. government bills Long-term U.S. government bonds Prime rate 1980 11.39 % 10.81 % 15.26 % 1993 2.92 % 6.85 % 6.00 % O A. Expected future short-term rates were falling in 1980 so that the average of the current and expected future short-term rates was lower. In 1993, the current short-term rate was low and expected future short-term rates were rising so that the average of these rates was higher. O B. 1980 was an anomaly referred to as an inverted yield curve. It was an anomaly because long-term rates are always higher than short-term rates. Many economists believe it was the cause of the rather severe 1981 recession. O C. In 1980, most debt holders believed that the inflation rate would decrease in the future. In contrast, in 1993, inflation was unusually low and debt holders were wary of higher inflation in the future. O D. Both A and C are correct

Answer 1

Question : Why the long term rates was higher than short term rates in 1993 but lower in 1980

Solution : the option ( b ) would be correct here .i.e.,

1980 was anomaly referred to as an inverted yield curve .It was an anomaly because long term rates are always higher than short term rates , shown in table in 1993 long term rate is higher ( 6.85 %) .

But also from table it can easily find that long term rate was lower ( 10.81 % ) in 1980 as it was the recession period in the USA economy .Many economists believes it was the cause of rather severe 1980 recession .