Berg observes that the current Treasury bond yield curve is upward sloping. Based on this observation, Berg forecasts that short-term interest rates will increase.
Is Berg’s short-term interest rate forecast consistent with the pure expectations theory and the liquidity premium theory?
A)Consistent with the pure expectations theory only. B)Consistent with both theories. C)Consistent with the liquidity premium theory only.
Schweser states A is the answer
"An upward sloping yield curve predicts an increase in short-term rates according to the pure expectations theory but not necessarily the liquidity premium theory.
The liquidity theory says that forward rates are a biased estimate of the market’s expectation of future rates because they include a liquidity premium. Therefore, a positively sloping yield curve may indicate either (1) that the market expects future interest rates to rise or (2) that rates are expected to remain constant (or even fall), but the addition of the liquidity premium results in a positive slope."
But since the criteria of expected short-term rates to increase is being met shouldn’t the answer be B?