What are the three shapes of the yield curve that tend to be associate

What are the three shapes of the yield curve that tend to be associated with different stages of the business cycle? How would you categorize the current business cycle? Explain your answer.

What will be an ideal response?

ANSWER

Periods of expansion are associated with upward-sloping yield curves, because inflation and interest rates tend to increase throughout an expansion. At troughs in the business cycle, yield curves tend to be upward sloping as well, but they start from a lower level. In contrast, yield curves tend to be inverted or downward sloping prior to a recession, with short-term rates higher than long-term rates. This inversion often occurs as central banks attempt to tighten monetary policy by increasing short-term rates (i.e., the discount rate) when the economy appears to be overheating and there is danger that inflation will increase. If the central bank is successful, then rates are expected to decline in the longer term. The current yield curve depends on current economic conditions.