Chapter 5 Outline

Chapter 5 Outline - Chapter 5: The Behavior of Interest...

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Department of Economics So Chapter 5: The Behavior of Interest Rates Econ 330: Money and Banking Fall 2007 Prof. Joseph Santos This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation.
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Department of Economics So [1] Introduction In this chapter, we examine how the overall level of nominal interest rates is determined and what factors influence this level. We learned in Chapter 4 that interest rates are inversely related to bond prices, so if we can explain why bond prices change, we can also explain why interest rates change. Because interest rates on different securities tend to move together, in this chapter we will proceed as if there were only one type of bond and, hence, a single interest rate in the entire economy. [1] Introduction [2] Determinants of Asset Demand [3] Supply and Demand in the Bond Market [4] Shifts in the Demand for Bonds [5] Shifts in the Supply of Bonds [6] The Fisher Effect This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation.
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Department of Economics So [2] Determinants of Asset Demand Wealth, or the total resources owned by the individual An increase in wealth increases the demand for assets. Expected return on one asset relative to alternative assets An increase in an assets’ (relative) expected return increases the demand for the asset. Risk, or the degree of uncertainty associated with the return on one asset relative to alternative assets Because most people are risk averse, especially in their financial decisions, we assume that an increase in an asset’s (relative) risk
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Chapter 5 Outline - Chapter 5: The Behavior of Interest...

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