An economist has forecast that the term structure of interest rates will remain flat.

(a) Discuss what is meant by a 'yield curve' and how it is constructed. (20 marks)

(b) Discuss why an understanding of yield curves is crucial to a fixed Income trader. (20 marks)

(c) Summarise your understanding of the liquidity preference theory. (20 marks)

(d) According to this theory, what does the economist's forecast imply will happen to future short-term interest rates? (20 marks)

(e) Explain why economists might monitor the spread between the 10 year and 3-month yields. (20 marks)