One of the problems in the portfolio management is explaining that a country is going to a recession in the next 12 months and that currently the yield curve is flat . The question is asking what would happen to the yield curve if the country goes into a recession. The answer is B because of the below explanations which to me makes not much sense because i thought that when a country enters a recession , yield curve is downward sloping.
If Carlisle’s prediction about the economy of Country #3 is realized, the yield curve in Country #3 will most likely:
A remain flat
B become upward sloping.
C become downward sloping.
B is correct. e yield curve in Country #3 is currently at (Exhibit 1), and Carlisle predicts a recession. During a recession, short-term rates tend to be lower because central banks tend to lower their policy rate in these times. However, the impact of monetary policy on longer-term rates will not be as strong because the central bank will usually be expected to bring short-term rates back to normal as the recession recedes. us, the slope of the yield curve will likely become upward sloping during the recession.