After looking at the yield curve a friend tells you that they think the one-year interest rate will be 3.4 percent next year. They also believe in the liquidity preference hypothesis of the term structure. You strongly disagree with the liquidity preference hypothesis and believe that the expectations theory is the correct term structure theory. Do you agree with their expectation of the future short-term interest rate? 

Explain your reason. And since you believe in the expectations theory of the term structure do you think it will be above or below their expectation?
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Expectation theory predicts future shortterm rates based on current long term rates While liquidity ... View the full answer