Which of the following statements is most correct? Other things held constant.
A)the "liquidity preference theory" would generally lead to an upward sloping yield curve.
B)the "market segmentation theory" would generally lead to an upward sloping yield curve.
C)the "expectations theory" would generally lead to an upward sloping yield curve.
D)the yield curve under "normal" conditions would be horizontal (i.e., flat).
E)a downward sloping yield curve would suggest that investors expect interest rates to increase in the future.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that investors prefer holding more liquid and shorter-term investments, which leads to higher demand for short-term bonds and lower demand for long-term bonds, resulting in a higher yield for long-term bonds and an upward sloping yield curve.

Which of the Following Statements Is Most Correct? Other Things