Chapter 11 Flashcards
What are the 4 determinants of asset demand?
Wealth
Expected Return
Risk
Liquidity
What is wealth?
It is the total resources owned by the individual, including all assets
What is expected retunr?
It is the return expected over the next period on one asset relative to alternative assets
What is liquidity?
it is the ease and speed with which an asset can be turned into cash relative to alternative assets
What are the four characteristics that describe the quantity demanded of an asset?
That it is positively related to wealth
That is is positively related to its expected return relative to alternative assets
That it is negatively related to the risk of its returns relative to alternative assets
That it is positively related to its liquidity relative to alternative assets
What are the characteristics of bond demand?
Lower prices increases the quantity demanded of bonds
Price and quantity demanded are inversely related
What are the characteristics of bond supply?
Lower prices decreases the quantity supplied of bonds
Price and quantity supplied are positively related
What is market equilibrium?
It is when the amount demanded at a give price equals the amount supplied
When Bd > Bs, there is what?
Excess demand and price will rise and interest will fall
When Bd < Bs, there is what?
There is excess supply and price will fall and interest rate will rise
How does wealth shift the demand curve for bonds?
Growing wealth shifts it to the right
How do expected returns shift the demand curve for bonds?
Higher expected future interest rates shifts the demand curve to the left
How does expected inflation shift the demand curve for bonds?
An increase in the expected rate of inflation shifts the demand curve to the left
How does risk shift the demand curve for bonds?
An increase in riskiness of bonds causes the demand curve to shift to the left
How does liquidity shift the demand curve for bonds?
An increased liquidity of bonds shifts the demand curve to the right
How do investment opportunities shift the supply curve for bonds?
Higher expected profitability of investment opportunities shifts the supply curve to the right
How does expected inflation shift the supply curve for bonds?
An increase in expected inflation shifts the supply curve to the right
How does government budget shift the supply curve for bonds?
Increased budget deficit shifts the supply curve to the right
What are the two ways to hold wealth?
Money and bonds
What does total wealth equal to>
It equals to the total amount of money and bonds
Bs +Ms = Bd + Md
Bs - Bd = Md - Ms
What happens to money when the interest rate increases?
The opportunity cost of holding money increases
The relative expected return of money increases
The quantity demanded of money decreases
What does the income effect do to the demand for money?
A higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right
What does the price-level effect doe to the demand for money?
A rise in the price level causes the demand for money at each interest rate to increase and the demand curve to shift to the right
What does a shift of the money supply curve to the right caused by an increased in the money supply engineered by the Bank of Canada tell us about the elasticity of money supply?
That it is perfectly inelastic
What is the income effect of an increase in the money supply?
It is a rise in the interest rate in response to a higher level of income
What is the price-level effect from an increase in the money supply?
It is a rise in interest rates in response to the rise in the price level
What is the expected-inflation effect of an increase in the money supply?
It is a rise in interest rates in response to the rise in the expected inflation rate
What does the liquidity preference framework lead to?
It leads to the conclusion that an increase in the money supply will lower interest rates (liquidity effect)
Why does the income effect find interest rates rising?
It finds interest rates rising because the money supply is an expansionary influence on the economy
What does the price-level effect prediction in an increase in the money supply lead to?
It leads to a rise in interest rates in response to the rise in the price level
Why does the expected-inflation effect show an increase in interest rates?
It shows an increase in interest rates because an increase in the money supply may lead to people to expect a higher price level in the future
