Cumulative Effect
What do you mean by the term Cumulative Effect?
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The Cumulative Effect:
• It shows the cumulative effect of the 3 economic factors which influence the shape of the yield curve: the real rate of interest, the inflation premium, and the interest rate risk premium.
• In a period of economic growth, both the real rate of interest and the inflation premium tend to rise monotonically over time.
• In a period of contraction, both real rate of interest and the inflation premium reduce monotonically over time.
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