Question

Historically, the yield curve has generally been ____, which indicates that long-term interest rates usually have been ____ short-term interest rates.

       upward sloping, lower than
       downward sloping, higher than
       upward sloping, higher than
       level, about equal to

Answer 1

Historically, the yield curve has generally been UPWARD SLOPING, which indicates that long-term interest rates usually have been HIGHER THAN short-term interest rates.

One basic understanding for this is that investors ask for higher interest rates for longer-term investments as compensation (=parting with liquidity) for investing their money in longer-duration investments.

keynes defined interest as parting with liquidity. so when someone gives his money for a longer period, he should be rewarded with higher amount of interest.
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