Suppose that the yield curve shows that the one-year bond yield is 7 percent, the two-year yield is 6 percent, and the three-year yield is 6 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

(Click to select)

upward sloping

flat

vertical

downward sloping