Lesson+10++Interest+Rate+Determination

Lesson+10++Interest+Rate+Determination - Lesson 10:...

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Lesson 10: Interest Rate Determination/Financing the Federal Government
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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
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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
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Basics: 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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Supply & Demand for Bonds
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This note was uploaded on 03/23/2011 for the course ECONOMICS 220 taught by Professor Clare during the Spring '08 term at Rutgers.

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Lesson+10++Interest+Rate+Determination - Lesson 10:...

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