Expectations Hypothesis

One basic theory of the term structure of interest rates is that short-term
and long-term interest rates are linked by the expectations hypothesis.
This is best expressed using the one-year interest rate RS and the two-year
interest rate RL. If RS^{*}_{t+1} is agents' expectation
of next year's short-term interest rate then the expected return to one-year
(rolled over) and two-year investments will be equal if

(1 + RL_{t})^{2} = (1 + RS_{t}) ( 1 +
RS^{*}_{t+1})

See also: Yield Curve and Term Structure of Interest Rates

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Arbitrage Pricing

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Call Option

Concave Function

Consumer Surplus

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Demand Curve

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Indifference Curve

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Intertemporal Substitution

Jensen's Inequality

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Unemployment Rate

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Widget

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