An economist has forecast that the term structure of interest rates will remain perfectly flat. According to the liquidity preference theory, the economist's forecast implies that future short-term interest rates will:
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A. B. C.A
According to the liquidity preference theory, which is one of the theories explaining the term structure of interest rates, the interest rates are determined by the supply and demand for money in the economy. This theory suggests that individuals have a preference for holding money rather than investing it, and they require an additional return, called the liquidity premium, for parting with their money and investing it for a longer term.
In the given scenario, the economist has forecasted that the term structure of interest rates will remain perfectly flat. This implies that there will be no change in interest rates across different maturities in the future. In other words, short-term interest rates are expected to remain the same as they are currently.
Therefore, the correct answer is C. Future short-term interest rates will equal the current short-term interest rates.