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4. Suppose an investor observes a downward term structure of interest rate. (1) According to the expectation hypothesis, what will be the investor ' s

4. Suppose an investor observes a downward term structure of interest rate.

(1) According to the expectation hypothesis, what will be the investor

s forecast about

future change of interest rate (increase, decrease or unchanged)? Explain your argument.

(10 marks)

(2) What will the investor say about the future change of interest rate according to liquidity

preference theory? Explain your argument. (10 marks)

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