What does an upward sloping yield curve indicate?

An upward sloping yield curve represents a situation where long-term interest rates are higher than short-term interest rates. This phenomenon typically occurs because investors expect higher risks or inflation in the future, and therefore demand a higher return for locking their capital away for a longer period.

When the yield curve slopes upward, it suggests optimism about economic growth and indicates that investors anticipate higher interest rates in the future. This is because they may expect that as the economy improves, central banks will likely raise rates to control inflation. In this context, long-term investments entail greater risks associated with potential changes in economic conditions, which is why they come with higher yields. This scenario contrasts with the other options, which do not accurately describe the implications of an upward sloping yield curve.