a piece of property that is a store of value
asset
determinants of asset demand
wealth, expected return, risk, liquidity
the total resources owned by the individual, including all assets
wealth
the return expected over the next period on one asset relative to alternative assets
expected return
the degree of uncertainty associated with the return on one asset relative to alternative assets
risk
the ease and speed with which an asset can be turned into cash relative to alternative assets
liquidity
Response of the Quantity of an Asset Demanded to Changes in Wealth, Expected Returns, Risk, and Liquidity
theory of portfolio choice
price of the bond and interest rate is ____. related
inversely
shifts in demand for bonds
wealth, expected returns, expected inflation, risk, liquidity
shifts in supply for bonds
Expected profitability of investment opportunities,
Expected inflation,
Government budget
Keynesian model that determines the equilibrium interest rate in terms of the supply of and demand for money
liquidity preference frame work
two main categories of assets that people use to store their wealth:
money and bonds
(demand for money in liquidity preference framework) As the interest rate increases:
opportunity cost of holding money increases, expected return decreases, quantity demanded of money decreases
shifts in the demand for money equilibrium under the liquidity preference framework
income effect and price-level effect
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
income effect
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
price-level effect
(shifts in the supply of money under the liquidity preference framework) supply of money is controlled by
central bank
Liquidity preference framework leads to the conclusion that an increase in the money supply will lower interest rates... known as
liquidity effect
___finds interest rates rising because increasing the money supply is an expansionary influence on the economy (the demand curve shifts to the right).
income effect
___ predicts 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)
price-level effect
___ shows 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).
expected inflation effect
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
price-level effect