KNOWLEDGE CHECK Look at the below yield curve inversion chart. What is most likely to happen as a result of the most recent yield curve inversion shown? GDP will dip Term premium will rise. GDP will rise. Term premium will remain constant Click to openiclose chart PREV SUBMIT
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The correct answer is GDP will dip Explanation: Yield curve: It is a plot of yields against various maturities. Yields are plotted in the vertical axis and maturities on the horizontal axis. It gives an overview of the interest rates in the market. When yields are increasing in the future, yield curve is upward sloping and vice versa. The yield curve can be categorized into three broad types namely normal yield curve, flat yield curve and inverse yield curve. The normal yield curve is defined as the yield curve which is upward sloping in shape. The inverse yield curve is defined as the yield curve which has a shape of downward sloping. The flat yield curve is described as the yield curve that is horizontal in nature As shown in the following figure, yield curve is downward sloping, so there is a chance of dip in the GDP in future.