The addition of the Liquidity Premium Theory to the Expectations Hypothesis allows us to explain why:
A)yield curves usually slope upward.
B)interest rates on bonds of different maturities move together.
C)long-term interest rates are less volatile than short term interest rates.
D)yield curves are flat.

Question

Quizplus · Accepted Answer

The Liquidity Premium Theory suggests that investors demand a premium for holding longer-term bonds to compensate them for the additional risk and potential price volatility. This additional premium leads to higher long-term interest rates compared to short-term interest rates, resulting in an upward-sloping yield curve.

The Addition of the Liquidity Premium Theory to the Expectations