The yield curve normally slopes upward because:

The yield curve normally slopes upward

Multiple choice — select the best answer

AShort-term bonds have higher credit risk than long-term bonds
BThe Federal Reserve sets long-term rates higher than short-term rates
CInvestors require higher yields to compensate for greater uncertainty and lower liquidity of longer maturities
DInflation is always lower in the short term

✓ Correct answer: C. Investors require higher yields to compensate for greater uncertainty and lower liquidity of longer maturities A normal (upward-sloping) yield curve reflects liquidity preference: investors demand a risk premium for tying up capital longer. Greater price volatility, reinvestment risk, and uncertainty over time justify higher long-term yields.

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Topic: Economic Factors

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The yield curve normally slopes upward because:

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