Liquidity preference theory suggests that for any given issuer, long-term interest rates tend to be higher than short-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer term securities; causes the yield curve to be upward-sloping.

Question

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Liquidity preference theory proposes that investors demand a higher return to be willing to tie up their funds in longer-term securities, which makes long-term interest rates higher than short-term rates. This phenomenon contributes to an upward-sloping yield curve.

Liquidity Preference Theory Suggests That for Any Given Issuer, Long-Term