3. We discussed changes in the yield curve that result from changes in the term premium, expectations of future interest rates, and monetary policy. In the table below, state whether

3. We discussed changes in the yield curve that result from changes in the term premium,
expectations of future interest rates, and monetary policy. In the table below, state whether
each situation is related to the term premium (TP), expectations of interest rates, or monetary
policy; whether you expect the given situation to result in a change to short-term or long-term
yields; and whether it will make the yield curve steeper (more normal) or flatter (flat or
inverted):
Situation
TP, Expectations,
Steeper or
or Policy?
ST or LT Yields?
Flatter?
Interest rates are expected to
increase due to strong economic
growth.
The Federal Reserve pursues a
higher target of the federal funds
rate.
Perceived long-term risk increases
due to worries about high
inflation.
Interest rates are expected to
decrease due to weakening
economic conditions.
The Federal Reserve pursues a
lower target of the federal funds
rate.
Perceived long-term risk decreases
as inflation is expected to stabilize.

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