According to the liquidity premium theory of the term structure,a steeply upward sloping yield curve indicates that short-term interest rates are expected to
A)rise in the future.
B)remain unchanged in the future.
C)decline moderately in the future.
D)decline sharply in the future.

Question

Quizplus · Accepted Answer

The liquidity premium theory states that investors demand a higher yield for longer-term bonds due to the increased risk involved. A steeply upward sloping yield curve means that the yields on longer-term bonds are significantly higher than short-term bonds, indicating that investors believe that short-term interest rates are expected to rise in the future.

According to the Liquidity Premium Theory of the Term Structure,a