The 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; this causes the yield curve to be upward-sloping.

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The liquidity preference theory states that long-term interest rates tend to be higher than short-term rates, causing the yield curve to be upward-sloping. This is due to the lower liquidity and higher sensitivity to interest rate changes of longer-term securities.

The Liquidity Preference Theory Suggests That for Any Given Issuer