Under the Liquidity Premium Theory, if investors expect short-term interest rates to remain constant, the yield curve should:
A) Have a positive slope
B) Have a negative slope
C) Be flat
D) Have an increasing slope

Question

Quizplus · Accepted Answer

The Liquidity Premium Theory suggests that long-term interest rates are generally higher than short-term rates due to the added risk of holding longer-term securities. Even if short-term rates are expected to remain constant, the yield curve will have a positive slope because of the liquidity premium.

Under the Liquidity Premium Theory, If Investors Expect Short-Term Interest