Podcast
Questions and Answers
What is the relationship between the quantity demanded of an asset and the risk of its returns relative to alternative assets?
What is the relationship between the quantity demanded of an asset and the risk of its returns relative to alternative assets?
Which of the following is NOT a characteristic that affects the quantity demanded of an asset?
Which of the following is NOT a characteristic that affects the quantity demanded of an asset?
What determines the interest rate in an economic system?
What determines the interest rate in an economic system?
Which of the following is NOT a type of interest rate in Malaysia?
Which of the following is NOT a type of interest rate in Malaysia?
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Why do we assume a single interest rate in the entire economy?
Why do we assume a single interest rate in the entire economy?
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What is the role of local, state, and federal governments in the credit market?
What is the role of local, state, and federal governments in the credit market?
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What happens to the demand for bonds when household savings increase?
What happens to the demand for bonds when household savings increase?
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What is the effect of higher expected interest rates in the future on the demand for long-term bonds?
What is the effect of higher expected interest rates in the future on the demand for long-term bonds?
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How does an increase in the expected return on other assets, such as stocks, affect the demand for bonds?
How does an increase in the expected return on other assets, such as stocks, affect the demand for bonds?
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What happens to the demand for bonds during a recession?
What happens to the demand for bonds during a recession?
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What is the effect of an increase in expected inflation on the demand for bonds?
What is the effect of an increase in expected inflation on the demand for bonds?
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What is the relationship between wealth and the demand for bonds?
What is the relationship between wealth and the demand for bonds?
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What happens to the expected return on bonds when there is an expected inflation?
What happens to the expected return on bonds when there is an expected inflation?
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What is the effect of an increase in the riskiness of bonds on the demand curve?
What is the effect of an increase in the riskiness of bonds on the demand curve?
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What is the result of increased information costs of bonds on the demand curve?
What is the result of increased information costs of bonds on the demand curve?
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What is the effect of an increase in liquidity on the demand curve for bonds?
What is the effect of an increase in liquidity on the demand curve for bonds?
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What is the primary assumption in Keynes' theory about individuals' financial asset preferences?
What is the primary assumption in Keynes' theory about individuals' financial asset preferences?
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What determines the equilibrium level of income according to Keynes?
What determines the equilibrium level of income according to Keynes?
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What happens to the price of bonds when there is a decrease in expected interest rate?
What happens to the price of bonds when there is a decrease in expected interest rate?
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What causes a shift in the supply of bonds?
What causes a shift in the supply of bonds?
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Why do people hold bonds instead of money, according to Keynes?
Why do people hold bonds instead of money, according to Keynes?
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What is the transactionary motive for holding money?
What is the transactionary motive for holding money?
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How does the interest rate affect the precautionary motive for holding money?
How does the interest rate affect the precautionary motive for holding money?
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What is the speculative motive for holding money?
What is the speculative motive for holding money?
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What is the impact of an increase in income on the demand for money?
What is the impact of an increase in income on the demand for money?
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What happens to the demand for money when the price level rises?
What happens to the demand for money when the price level rises?
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What is the relationship between the price of bonds and the interest rate?
What is the relationship between the price of bonds and the interest rate?
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What are the two factors that cause the demand curve for money to shift?
What are the two factors that cause the demand curve for money to shift?
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Why do people want to hold more money as income rises?
Why do people want to hold more money as income rises?
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What is the effect of a rise in the price level on the demand for money?
What is the effect of a rise in the price level on the demand for money?
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Study Notes
Determinants of Bond Demand
- Wealth: an increase in wealth leads to a rise in the demand for bonds and a shift to the right of the demand curve
- Expected return:
- Higher expected interest rates in the future lower the expected return for long-term bonds, decreasing demand and shifting the demand curve to the left
- Changes in expected return on other assets (e.g., stocks, real assets) can also shift the demand curve for bonds
- An increase in expected inflation lowers the expected return for bonds, causing demand to decline and the demand curve to shift to the left
- Saving: an increase in household saving leads to an increase in wealth, raising the demand for bonds and shifting the demand curve to the right
Interest Rate Determination in an Economic System
- The interest rate is determined through the interaction of the supply of funds (savings or loanable funds) and the demand for surplus funds (demand for loanable funds) in the credit market
- The quantity demanded of an asset is negatively related to the risk of its returns relative to alternative assets
- The quantity demanded of an asset is positively related to its liquidity relative to alternative assets
Changes in Equilibrium Interest Rates
- Shifts in the demand for money:
- Income effect: an increase in income causes the demand for money to increase and the demand curve to shift to the right
- Price-level effect: a rise in the price level causes the demand for money to increase and the demand curve to shift to the right
- Keynes's liquidity preference analysis:
- Individuals inherently prefer money among all financial assets
- Interest is paid to persuade people to exchange their money for less liquid assets
- There are three motives behind the general preference for holding highly liquid money: transaction, precaution, and speculation
Keynes's Motives
- Transaction motive:
- Demand for money is positively determined by income
- Interest rate does not have any influence on the demand for money
- Precautionary motive:
- Demand for money is positively determined by income
- Interest rate does not have any influence on the demand for money
- Speculative motive:
- Demand for money is negatively influenced by interest rate
- People may hold money balances in excess of their transactions and precautionary needs to take advantage of changes in bond prices
Risks, Liquidity, and Information Costs of Bonds
- Risks: an increase in the riskiness of bonds causes the demand for bonds to fall and the demand curve to shift to the left
- Liquidity: increased liquidity of bonds results in an increased demand for bonds, and the demand curve shifts to the right
- Information costs: increased information on bonds results in an increased demand for bonds, and the demand curve shifts to the right
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Description
Learn about the factors that influence the demand and supply of assets, including risk and liquidity. Understand how the interest rate is determined through the interaction of supply and demand in the credit market.
