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 should 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 states that long-term interest rates are normally higher than short-term interest rates. This is because investors require a higher rate of return on their investments in long-term bonds to compensate for the higher risk of tying up their money for a longer period. Therefore, this theory generally leads to an upward sloping yield curve.

Which of the Following Statements Is Most Correct? Other Things