If the liquidity preference theory of the term structure is correct,we would expect the size of the maturity risk premium to increase with maturity.Thus,we might observe an upward sloping yield curve,even if future short-term rates are expected to decrease.

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According to the liquidity preference theory, investors require a premium for investing in longer-term bonds due to the higher liquidity risk. Therefore, the maturity risk premium should increase with maturity, leading to an upward-sloping yield curve. This is true even if future short-term rates are expected to decrease, as the premium compensates for the additional risk, not just for the higher future rates.

If the Liquidity Preference Theory of the Term Structure Is