Ch. 5 The Behavior of Interest Rates

Asset prices wealth in a business cycle expansion

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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, 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
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