Multiple Effects on the Yield Curve:
Assume that
(1) investors and borrowers expect that the economy will weaken and that inflation will decline,
(2) investors require a small liquidity premium, and
(3) markets are partially segmented and the Treasury currently has a preference for borrowing in short-term markets.
Explain how each of these forces would affect the term structure, holding other factors constant. Then explain the effect on the term structure overall.