Chapter 5 The Behavior Of Interest Rates

Front 1

Wealth

Back 1

the total resources owned by the individual, including all assets

Front 2

Expected Return

Back 2

the return expected over the next period on one asset relative to alternative assets

Front 3

Risk

Back 3

the degree of uncertainty associated with the return on one asset relative to alternative assets

Front 4

Liquidity

Back 4

the ease and speed with which an asset can be turned into cash relative to alternative assets

Front 5

Holding all other factors constant:
The quantity demanded of an asset is positively related

Back 5

to Wealth, its expected return relative to alternative assets, and its liquidity relative to alternative assets

Front 6

Holding all other factors constant:
The quantity demanded of an asset is negatively related

Back 6

the risk of its returns relative to alternative assets

Front 7

At lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher:

Back 7

an inverse relationship

Front 8

At lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower

Back 8

a positive relationship

Front 9

Market Equilibrium

Back 9

Occurs when the amount that people are willing to buy (demand) equals the amount that people are willing to sell (supply) at a given price

Front 10

When Bd > Bs

Back 10

there is excess demand, price will rise and interest rate will fall

Front 11

When Bd < Bs

Back 11

there is excess supply, price will fall and interest rate will rise

Front 12

In response to the shifts in the demand for bonds:
In an expansion with growing wealth..

Back 12

the demand curve for bonds shifts to the right

Front 13

In response to the shifts in the demand for bonds: Higher expected interest rates in the future lower the expected return for long-term bonds..

Back 13

shifting the demand curve to the left

Front 14

In response to the shifts in the demand for bonds:
An increase in the expected rate of inflation lowers the expected return for bonds

Back 14

causing the demand curve to shift to the left

Front 15

In response to the shifts in the demand for bonds:
An increase in the riskiness of bonds causes

Back 15

the demand curve to shift to the left

Front 16

In response to the shifts in the demand for bonds:
Increased liquidity of bonds results in

Back 16

the demand curve shifting right

Front 17

In response to the shifts in the supply for bonds:
Expected profitability of investment opportunities: in an expansion

Back 17

the supply curve shifts to the right

Front 18

In response to the shifts in the supply for bonds:
Expected inflation: an increase in expected inflation shifts

Back 18

the supply curve for bonds to the right

Front 19

In response to the shifts in the supply for bonds:
Government budget: increased budget deficits shift

Back 19

the supply curve to the right

Front 20

Fisher Effect

Back 20

When expected inflation rises, interest rates will rise

Front 21

Liquidity Preference Framework

Back 21

determines the equilibrium interest rate in terms of the supply of and demand for money

Front 22

As the interest rate increases:

Back 22

The opportunity cost of holding money increases, the relative expected return of money decreases, and therefore the quantity demanded of money decreases.

Front 23

Shifts in the demand for money can be caused by

Back 23

Income effect and price level effect

Front 24

Income Effect:

Back 24

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

Front 25

Price-Level Effect:

Back 25

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

Front 26

An increase in the money supply engineered by the Federal Reserve will shift the supply curve for money

Back 26

to the right

Front 27

A one time increase in the money supply will cause prices to

Back 27

rise to a permanently higher level by the end of the year. The interest rate will rise via the increased prices.

Front 28

Price-level effect remains

Back 28

even after prices have stopped rising.

Front 29

A rising price level will

Back 29

raise interest rates because people will expect inflation to be higher over the course of the year. When the price level stops rising, expectations of inflation will return to zero.

Front 30

Expected-inflation effect persists

Back 30

only as long as the price level continues to rise.

Front 31

Liquidity preference framework leads to the conclusion that

Back 31

an increase in the money supply will lower interest rates: the liquidity effect.

Front 32

Income effect finds interest rates rising because

Back 32

increasing the money supply is an expansionary influence on the economy (the demand curve shifts to the right).

Front 33

Price-Level effect predicts

Back 33

an increase in the money supply leads to a rise in interest rates in response to the rise in the price level (the demand curve shifts to the right).

Front 34

Expected-Inflation effect shows

Back 34

an increase in interest rates because an increase in the money supply may lead people to expect a higher price level in the future (the demand curve shifts to the right).

Front 35

Excess supply

Back 35

when quantity of bonds exceeds quantity demaned

Front 36

Excess demand

Back 36

when quantity of bonds demanded exceeds quantity supplied