How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?
What will be an ideal response?
During normal economic times, future short-term interest rates are not expected to differ much from current short-term interest rates. In this case, long-term interest rates will be higher than short-term interest rates due to a term premium since long-term interest rates reflect the average of current and expected short-term interest rates plus a term premium.
You might also like to view...
In the short run,
a. utilization of any input can be varied b. production takes less than one year c. all resources are limited in supply d. utilization of some inputs is assumed constant e. equilibrium cannot occur
When exchange rates are set by government decree,
a. appreciation is called devaluation. b. depreciation is called devaluation. c. depreciation is called deflation. d. appreciation is called inflation.