If the yield curve slope is flat, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting
A) a mild rise in short-term interest rates in the near future and a mild decline further out in the future.
B) constant short-term interest rates in the near future and further out in the future.
C) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future.
D) constant short-term interest rates in the near future and a mild decline further out in the future.
Answer: C
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