According to the liquidity premium theory of the term structure
A) bonds of different maturities are not substitutes.
B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates.
C) yield curves should never slope downward.
D) interest rates on bonds of different maturities do not move together over time.
Answer: B
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