Ch. 5 The Behavior of Interest Rates

Quantity demanded of an asset is negatively related

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3. Quantity demanded of an asset is negatively related to the risk of its returns relative to alternative assets 4. Quantity demanded of an asset is positively related to its liquidity relative to alternative assets Demand curve : shows the relationship between the quantity demanded and the price when all other economic variables are held constant Supply curve : shows the relationship between the quantity supplied and the price when all other economic variables are held constant Market equilibrium : when supply and demand curve intersect Excess supply : quantity of bonds supplied exceeds quantity of bonds demanded; prices would have to fall Excess demand : quantity demanded is greater than the quantity supplied results in driving prices up
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Loanable funds : horizontal axis; defined as the quantity of loans Loanable funds framework : supply and demand diagrams explain how interest rates are determined in the bond market Asset market approach : emphasizes stocks of assets rather than flows in determining asset prices Wealth >> In a business cycle expansion with growing wealth, the demand for bonds rises and the demand curve for bonds shifts to the right >> In a recession, when income and wealth are falling, the demand for bonds fall, and the demand curve shifts to the left Expected Returns >> Higher expected interest rates in the future lower the expected return for long-term bonds, decrease the demand, and shift the demand curve to the left >> Lower expected interest rates in the future increase the demand for long-term bonds and shift the demand curve to the right >> An increase in the expected rate of inflation lowers the expected return for bonds,
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Quantity demanded of an asset is negatively related to the...

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