Expectations Theory is a financial theory that explains how the future interest rates are determined based on current interest rates. It suggests that the long-term interest rates reflect the market's expectations of future short-term interest rates. For example, if investors believe that short-term rates will rise, long-term rates will also increase to align with those expectations. This theory is often used to understand the yield curve, which is a graph that shows the relationship between interest rates and different maturities of debt. A normal upward-sloping yield curve indicates that investors expect higher rates in the future, while an inverted yield curve may signal expectations of falling rates or economic downturns.