Chapter 5

Chapter 5 - Chapter 5-The Behavior of Interest Rates...

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Chapter 5 - The Behavior of Interest Rates Determining the Quantity Demanded of an Asset •Wealth: the total resources owned by the individual, including all assets •Expected Return: the return expected over the next period on one asset relative to alternative assets •Risk: the degree of uncertainty associated with the return on one asset relative to alternative assets •Liquidity: the ease and speed with which an asset can be turned into cash relative to alternative assets Theory of Asset Demand Holding all other factors constant: 1.The quantity demanded of an asset is positively related to wealth 2.The quantity demanded of an asset is positively related to its expected return relative to alternative assets 3.The quantity demanded of an asset is negatively related to the risk of its returns relative to alternative assets 4.The quantity demanded of an asset is positively related to its liquidity relative to alternative assets Supply and Demand for Bonds •At lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher: an inverse relationship •At lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower: a positive relationship
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Market Equilibrium •Occurs when the amount that people are willing to buy (demand) equals the
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Chapter 5 - Chapter 5-The Behavior of Interest Rates...

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