1. Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
2. Under the liquidity preference theory, if inflation is expected to be falling over the next few years, long-term interest rates will be higher than short-term rates. True/false/uncertain? Why?
3. If the liquidity preference hypothesis is true, what shape should the term structure curve have in a period where interest rates are expected to be constant?