According to the liquidity premium theory,a steep yield curve may be an indicator of
A) expectations of a significant increase in inflation.
B) an upcoming recession.
C) an economic slowdown.
D) lower future short-term interest rates.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that long-term interest rates not only reflect investors' assumptions about future interest rates but also include a premium for holding longer-term bonds, due to their greater risk. A steep yield curve, according to this theory, can indicate that investors expect higher inflation in the future, as they demand higher yields to compensate for the anticipated decrease in the purchasing power of their money.

According to the Liquidity Premium Theory,a Steep Yield Curve May