Can someone provide an intuitive explanation as to why exactly this happens…please Monetary Policy-------- Fiscal Policy---------Yield Curve Shape 1. Expansive---------------Expansive-----------Upward Sloping 2. Restrictive---------------Restrictive-----------Downward Sloping 3. Expansive---------------Restrictive-----------Upward Sloping (but less steep than 1) 4. Restrictive---------------Expansive-----------Flat
Based on expectations theory of interest rates. If both M and F policy is expansive it is expected that the economy will heat up and require interest rate hikes in the future. This is expressed in a upward sloping yield curve. 2 year rate = (1 year rate) * (1 year rate one year from now) The one year rate a year from now, if the yield curve is upward sloping must be larger than current rate. That means interest rates are expected to increase consistent with number 1 in your post. This same logic explains the rest as M policy trumps F policy.
1 is the normal shape of yield curve in an expanding economy. 2 is what happens when the fed wants the economy to slowdown (because of high inflation ) and tightens up. 3 & 4 are where both the direction control tools are acting in opposite directions, so the curve should be more or less flat. 3. is easy money supply/low interest rates, so this can affect the short end easily, so this makes it slightly upward sloping, by pulling short end down. 4. doesnt have the same leverage on long end as 3 does on short end. So 4 will lead to a flat yield curve. Hope this helps. Cheers 
awesome! thanks guys… either of you wanna come give me tutoring sessions?! the guy on the schweser books just isn’t helping me much…!
That dude is freaky…
for sure… try this…put your book down on a table/bed/stool…and move around while keeping your eyes locked with his…it’s like he’s watching you no matter where you go!!! umm…i guess i need to start using my time more efficiently …
Why couldn’t they find another Schweser girl??? If there was a playboy model…I would definitely be puttin in more hours for this exam…
especially on those cold lonely nights…