What is the primary difference between liquidity preference theory and expectations theory in shaping the yield curve?

• A. Liquidity preference theory and expectations theory both ignore future rate expectations.
• B. Liquidity preference theory adds a liquidity premium to yields; expectations theory says yields reflect expected future rates.
• C. Expectations theory includes a liquidity premium while liquidity preference does not.
• D. Both theories predict identical yield curves in all conditions.

Answer: (B)