Term
| Determinants of Asset Demand |
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Definition
Wealth: the total resources owned by the individual, including all assets
Expected Return: the return expected over the next period on one asset relative to alternative assets
Risk: the degree of uncertainty associated with the return on one asset relative to alternative assets
Liquidity: the ease and speed with which an asset can be turned into cash relative to alternative assets |
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Term
| Theory of Portfolio Choice |
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Definition
The quantity demanded of an asset is positively related to wealth
The quantity demanded of an asset is positively related to its expected return relative to alternative assets
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 |
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Term
| How does wealth affect the demand curve? |
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Definition
| Economy grows, wealth increases, Bd increases, Bd shifts out to right |
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Term
| How does Expected Return affect the demand curve? |
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Definition
i Decreases in future, Re for long-term bonds increases, Bd shifts out to right
B. inflation decreases, Relative Re increases, Bd shifts out to right
Expected return of other assets increases, Bd decreases, Bd shifts out to left |
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Term
| How does the risk of bonds affect the demand curve? |
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Definition
Risk of bonds decreases, Bd increases, Bd shifts out to right
Risk of other assets increases, Bd increases, Bd shifts out to right |
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Term
| How does liquidity affect the demand curve? |
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Definition
Liquidity of Bonds increases, Bd increases, Bd shifts out to right
B. Liquidity of other assets decreases, Bd increases, Bd shifts out to right |
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Term
| 3 factors that shift the supply curve of bonds |
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Definition
Profitability of investments- The better investments, the more money people have to spend on bonds
Expected Inflation- the higher the expected inflation, the more bonds that will be issued because it will cost relatively less
Government Deficit- The more the deficit, the more money the government needs to borrow, increasing the supply of bonds |
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Term
| What will happen to the real cost of bonds when expected inflation occurs? |
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Definition
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Term
| What happens to bond prices during recession? |
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Definition
Increases, interest rates fall
The Supply is shifted more left than the demand |
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Term
| How does a rise in information costs shift the demand curve? |
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Definition
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Term
| How would a decrease in business taxes affect the bond supply curve? |
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Definition
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