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 longer-term securities carry a premium to compensate for their greater risk, leading to a positive slope in the yield curve even if short-term rates are expected to remain constant.

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