What does the yield curve represent?

The yield curve is a crucial concept in finance and economics, representing the relationship between interest rates and the time to maturity of debt for a given borrower. When considering option B, it highlights the yield curve as a reflection of investor expectations regarding future interest rates and overall economic activity.

Specifically, the yield curve typically plots the yields of bonds with varying maturities, most commonly government bonds. A normal upward-sloping yield curve indicates that investors expect stronger economic growth and potentially higher interest rates in the future, as they require a higher return on longer-term investments to compensate for additional risks, including inflation. Conversely, an inverted yield curve may signal a forthcoming recession, as it reflects investor sentiment that short-term rates are expected to fall due to anticipated economic downturns.

In contrast, the other options do not accurately represent what a yield curve signifies. A graphical representation of tax rates focuses on fiscal policy rather than monetary indicators; the supply of money in an economy relates more to central bank policies like open market operations and not investor expectations; and government spending over time is a measure of fiscal policy rather than a depiction of interest rate dynamics. Thus, option B effectively encapsulates the essence of what the yield curve signifies in the context of investor sentiment and economic forecasts.