The related para Berg also observes that current treasury yield curve is upward sloping. Based on this, Berg forecasts that short term int rates will rise, Qn: Is Berg’s short term int rate forecast consistent with pure expectation theory and liquidity premium theory? A. Both B. only pure expectations thery C. Only liquidity prem theory Answer says B; however I believe it should be A; upward sloping indicates that the tail end of the curve is higher by the liquidity prem; am I missing something?
Under Liquidity Prem Theory, Short Term Interest rates don’t have to rise in the future to explain an upward sloping yeild curve. Short term rates could be expected to remain flat and the yeild curve would still be upward sloping because of the liq prem. Where as under Pure Expectations if short term rates were expected to remain flat, then your yeild curve would be flat.