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What is the yield curve? Why is the yield curve considered a leading economic indicator? Which
of the following are congruent with a steepening, upward sloping yield curve? Why or why not?
Monetary policy and fiscal policy are expansive
Monetary policy is expensive while fiscal policy is restrictive
Monetary policy and fiscal policy are restrictive
Solution
Yield curve refers to a graph in which the yield is displayed against time. It is a line which plots
the interest rates of securities which have different maturing dates. Upward sloping yield curve
indicates that the yields are higher on longer term securities.
Monetary policy and fiscal policy are expansive
When fiscal policy is expansive the tax rates are lower and people have higher disposable
income. So there is expectation of inflation in future. This causes the yields of long term
securities to increase

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