The liquidity preference theory states that each borrower and lender has a preferred maturity and that the slope of the yield curve depends on supply and demand for funds in the long-term market relative to the short-term market.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that investors demand a premium for longer-term investments due to increased risk, leading to an upward-sloping yield curve, not based on preferred maturities.

The Liquidity Preference Theory States That Each Borrower and Lender