Ch. 5 The Behavior of Interest Rates

An increase in the expected rate of inflation lowers

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An increase in the expected rate of inflation lowers the expected return for bonds, causing their demand to decline and the demand curve to shift left Risk >> An increase in the riskiness of bonds causes the demand for bonds to fall and the demand curve to shift to the left >> An increase in the riskiness of alternative assets causes the demand for bonds to rise and the demand curve to shift to her right Liquidity >> Increased liquidity of bonds results in an increased demand for bonds, and the demand curve shifts to the right >> Increased liquidity of alternative assets lowers the demand for bonds and shifts the demand curve to the left
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Shifts in the Supply of Bonds 1. Expected profitability of investment opportunities >> In a business cycle expansion, the supply of bonds increases, and the supply curve shifts to the right >> In a recession, where there are fewer expected profitable investment opportunities, the supply of bonds falls, and the supply curve shifts to the left 2. Expected inflation >> An increase in expected inflation causes the supply of bonds to increase and the supply curve to shift to the right 3. Government activities >> Higher gov’t deficits increase the supply of bonds and shifts the supply curve to the right >> Gov’t surpluses decrease the supply of bonds and shift the supply curve to the left Fisher effect : when expected inflation rises, interest rates will rise Opportunity cost : the amount of interest sacrificed by not holding the alternative asset
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An increase in the expected rate of inflation lowers the...

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