Suppose that the yield curve shows that the one-year bond yield is 2 percent, the two-year yield is 3 percent, and the three-year yield is 4 percent. Assume that the risk premium on the one-year bond is zero, the risk premium on the two-year bond is 1 percent, and the risk premium on the three-year bond is 2 percent.

a. What are the expected one-year interest rates next year and the following year?

The expected one-year interest rate next year =%

The expected one-year interest rate the following year =%

b. If the risk premiums were all zero, as in the expectetions hypothesis, what would the slope of the yield curve be?

The slope of the yield curve would be

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upward sloping

downward sloping

flat

vertical