30Chp5-Econ3310 - Bond Market Equilibrium Interest Rates...

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Unformatted text preview: Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF 3. Money supply → higher expected inflation in the future → lowers expected real returns on bonds (Fisher effect)→ higher interest rates 2. Money supply → higher prices→ higher prices shifts money demand to the right (price level effect)→ higher interest rates 1. Money supply up → economic activity expands → higher income shifts money demand to the right (income effect) → higher interest rates Liquidity preference framework says an increase in the money supply lowers interest rates: the liquidity effect. However, there are second round effects: Everything Else Remaining Equal? Asset Demand ...
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This note was uploaded on 02/14/2012 for the course ECON 3310 taught by Professor Dix during the Fall '08 term at York University.

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