2. Suppose an investor observes a flat term structure of interest rate. Answer the following...
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2. Suppose an investor observes a flat term structure of interest rate. Answer the following questions.
(a) According to the expectation hypothesis, what will be the investors forecast about future change of interest rate (increase, decrease or unchanged)? Explain your argument. (10 marks).
(b) What will the investor say about the future change of interest rate according to liquidity preference theory? Explain your argument. (10 marks)
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