1. If we observe that the yield on both the 1-year and the 2-year Treasuries are 2% and there is a positive liquidity premium, then, according to the liquidity premium theory market participants expect that the 1-year interest rate next year will be:
a. 2%
b. higher than 2%
c. lower then 2%
d. we can't tell
2. According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to
A)
rise in the future.
B)
decline sharply in the future.
C)
remain unchanged in the future.
D)
decline moderately in the future.
3.
An inverted yield curve could mean that people expect: (Mark ALL that are relevant below)
a)
an economic expansion in the future.
b)
higher inflation in the future.
c)
a recession in the future.
d)
lower inflation in the future.