Discuss whether the following statement is true or false:
The existence of a downward-sloping yield curve is inconsistent with the liquidity preference theory.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that the premium required by the investors for the cash invested by them is directly proportional to the term of investment.This means,the longer the maturity,the higher the premium that would be demanded by the investor.This will result in an upward-sloping yield curve.Under expectations theory,a downward sloping yield curve indicates that short-term rates are expected to decline.

Discuss Whether the Following Statement Is True or False