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The document discusses the determinants of asset demand and the supply and demand of bonds in the bond market. It outlines four key determinants of asset demand: wealth, expected return, risk, and liquidity. It then explains the negative relationship between bond price and quantity demanded, and the positive relationship between price and quantity supplied. The document uses a graph to illustrate the bond market equilibrium where demand and supply are equal, and how shifts in either curve can cause changes in the equilibrium interest rate.
The document discusses the determinants of asset demand and the supply and demand of bonds in the bond market. It outlines four key determinants of asset demand: wealth, expected return, risk, and liquidity. It then explains the negative relationship between bond price and quantity demanded, and the positive relationship between price and quantity supplied. The document uses a graph to illustrate the bond market equilibrium where demand and supply are equal, and how shifts in either curve can cause changes in the equilibrium interest rate.
The document discusses the determinants of asset demand and the supply and demand of bonds in the bond market. It outlines four key determinants of asset demand: wealth, expected return, risk, and liquidity. It then explains the negative relationship between bond price and quantity demanded, and the positive relationship between price and quantity supplied. The document uses a graph to illustrate the bond market equilibrium where demand and supply are equal, and how shifts in either curve can cause changes in the equilibrium interest rate.
1. Wealth a. the total resources owned by the individual, including all assets b. If households save more, wealth increases and, as we have seen, the demand for bonds rises and the demand curve for bonds shifts to the right 2. Expected Return a. The return expected over the next period on one asset relative to the expected return on alternative assets b. 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. c. Lower expected interest rates in the future increase the demand for long- term bonds and shift the demand curve to the right d. 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 to the left. 3. Risk a. The degree of uncertainty associated with the return on one asset relative to the degree of uncertainty of alternative assets b. An increase in the riskiness of alternative assets causes the demand for bonds to rise and the demand curve to shift to the right 4. Liquidity a. The ease and speed with which an asset can be turned into cash relative to the liquidity of alternative assets B. Supply and demand in bond market Demand for bonds At lower price (hi interest rates), ceteris paribus, the quantity demanded for bond is higher negative relationship between price & quantity Supply of Bonds At lower prices (hi interest rates) , ceteris paribus, quantity supllied is low Positive relationship with price and quantity
* Derivation of the demands for bonds
Market equilibrium a. When = b. When > (Excess supply) P , i c. When < (Excess demand) P, i
Points in the Graph:
Demand for bonds Point A : P = 950 (1000950) i= = 0.053 = 5.3%, Bd = 100 billion 950 Point B : P = 900 (1000900) i= = 0.111 = 11.1%, = 200 900 Point C: P = 850, i = 17.6% Bd = 300 billion Point D: P = 800, i = 25.0% Bd = 400 billion Point E: P = 750, i = 33.0% Bd = 500 billion Supply for bonds Point F: P = 750, i = 33.0%, Bs = 100 billion Point G: P = 800, i = 25.0%, Bs = 200 billion Point C: P = 850, i = 17.6%, Bs = 300 billion Point H: P = 900, i = 11.1%, Bs = 400 billion C. Change in equilibrium in the interest rates 1. Shifts in demands for bonds 2. Shifts in the supply of bonds 3. Change in the : Fisher effect