page 40, 108, how can the answer be D? I choose C.
Because an upward sloping term structure would result from investors thinking short term rates to rise, not remain unchanged then rise. Answer D is correct given that the liquidity preference theory is essentially the same as the pure expecations theory with the addition of a liquidity premium that increases with a bond’s maturity. This liquidity premium may or may not change the shape of the yield curve.
I chose C too and got it wrong. Can someone please clarify if just based on liquidity premium ONLY, the term structure can be downward sloping ? I have seen conflicting views…