According to the liquidity preference hypothesis yield curves generally slope upward because
A) investors prefer short maturity obligations to long maturity obligations.
B) investors prefer long maturity obligations to short maturity obligations.
C) investors prefer less volatile long maturity obligations.
D) investors prefer more volatile short maturity obligations.
E) none of the above.

Question

Quizplus · Accepted Answer

The liquidity preference hypothesis states that investors prefer to hold their wealth in more liquid assets, which are typically short-term securities. As a result, demand for short-term securities increases, causing their prices to rise and their yields to fall relative to long-term securities. This leads to an upward slope of the yield curve. Therefore, choice A, which suggests that investors prefer short maturity obligations, is the correct answer.

According to the Liquidity Preference Hypothesis Yield Curves Generally Slope