n-year interest rate -
- constant annual interest rate making present bond price equal to present value of future payments
- P2t = (final payment) / [(1+it)(1+it+1)] = (final payment) / (1+i2t)2
- (1+i2t)2 = (1+it)(1+it+1)
- i2t ~ 0.5 (it+it+1)
- 2 year interest rate approximately the average of the current and the following year's (expected) interest rate
- long term interest rates relate to current and future expected short-term interest rates
yield curve - relating long and short term interest rates
- it+1 = 2i2t - it
- soft landing - mild slowdown back to natural output level
- monetary expansion needed to counteract an adverse shift in spending (negative IS shift)
- would result in even lower interest
- upward sloping >> long-term interest rates higher than short-term >> financial markets expect higher rates in the future
- downward sloping >> financial markets expect lower interest rates in future
- expectations enough to change actions of financial market
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Subject X2:
