Support for the Addition of a Liquidity Premium to the Expectations

question 7

Multiple Choice

Support for the addition of a liquidity premium to the expectations theory is derived from:

• A) the slope of the observed normal yield curve is steeper than that of expectation theory.
• B) the slope of the observed normal yield curve is flatter than that of expectation theory.
• C) the liquidity premium decreases over time.
• D) in times of tight monetary policy an inverse yield curve becomes more inverse.

---

Definitions:

Degrees Of Freedom

The number of values in the calculation of a statistic that are free to vary, often related to the sample size.

Pearson Correlation

A measure of the linear correlation between two variables, giving a value between -1 and 1 inclusive, where 1 is total positive linear correlation, 0 is no linear correlation, and -1 is total negative linear correlation.

Negative Number

A real number that is less than zero, indicating a lack of something or a decrease in a given value.

Pearson Correlation Coefficient

The Pearson Correlation Coefficient is a measure of the linear correlation between two variables, ranging from -1 to +1, where 1 means a perfect positive correlation and -1 means a perfect negative correlation.