Liquidity Preference Theory Yield Curve

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Contents:Liquidity Preference Example¶How Does Liquidity Preference Theory Work?Preferred Habitat TheoryThe expectations theoryTheory Flat or downward sloping yield curves are mainly caused by declining future short-term interest rates. The local expectations form of the pure expectations theory recognizes that in the long term interest rate and reinvestment risks are important. In the short term these risks are ignored and investors are assumed to be indifferent between different instruments. For example, it states that the two alternative strategies mentioned above may not...