A rise in observed long-term interest rates relative to observed
short-term rates
1. makes it advantageous to borrow long-term and lend
short-term because greater inflation is expected in the
long-run.
2. makes it advantageous to borrow short-term and lend
long-term to take advantage of the difference in rates.
3. might well be explained by an expectation of greater
inflation rates in the long-run than in the short-run.
4. means that borrowers and lenders value long-term and
short-term bonds equally once an adjustment has been made for expected inflation.