Chapter 5
Money and bonds
There are two main categories of assets that people use to store their wealth: ______ and ______
quantity demanded of bonds
There is a Negative relationship between price of bonds and the _______
Opportunity cost concept
We can also see that the quantity of money demanded and interest rates are negatively related using the _______, which is the amount of interest (expected return) sacrificed by not holding the alternative asset, a bond. As the interest rate on bonds rises, the opportunity cost of holding money rises, so money is less desirable and the quantity of money demanded falls
total resources owned by the individual, including all assets
Wealth is the _________
an excess supply. fall rise
When Bd < Bs, there is _______. the price of bonds will ______ and the interest rate will ________
defines the equilibrium (or market clearing price) and interest rate
When Bd = Bs:
excess demand. rise fall
When Bd > Bs there is ________. The price of bonds will ____ and the interest rate will _____
rising
When income is ______ during a business cycle expansion, interest rates will rise
higher lowering
When individuals become wealthier, they demand more bonds, driving the price of bonds ______ while _______ the interest rates.
high decreases
When interest rates are______, the cost of borrowing is high, so quantity of bonds supplied _______
opportunity cost
When interest rates rise the _____ of holding cash increases. People respond by decreasing their demand for money
increase rise
Expansion also affects the demand for bonds. As the economy expands, wealth is likely to________, and the theory of portfolio choice says that the demand for bonds will ____
return expected over the next period on one asset relative to alternative assets
Expected Return is the ________
raising capital, it's like taking out loans
Firms/government agencies offer bonds as a way of _______
identical
For a 1-year discount bond and a 1-year holding period, the expected return and the interest rates are _______, so nothing other than today's interest rate affects the expected return
increases falls
For a given interest rate (and bond price), when expected inflation________, the real cost of borrowing ______, so the quantity of bonds supplied increases at any given price.
decrease left
Government surpluses _____ the supply of bonds and shift the supply curve to the _____
decrease left
Higher expected interest rates in the future lower the expected return for long-term bonds, ______ the demand, shifting the demand curve to the _____: There might be a capital loss
increase right
Higher government budget deficits _____ the supply of bonds and shift the supply curve to the _____
Increase right
Higher government deficits ____ the supply of bonds and shift the supply curve to the ____, everything else held constant
positively related An increase in wealth raises the quantity demanded of an asset
Holding all other factors constant, The quantity demanded of an asset is ______ to wealth
rise in interest rates
The income effect of an increase in the growth rate of the money supply is a _____ in response to the higher level of income.
cost of borrowing
The interest cost for people selling bonds is the ________
negatively related falls
The interest rate is _______ to bond price, so when the equilibrium bond price rises, the equilibrium interest rate ______.
desirable it is greater will be the quantity demanded.
The more liquid an asset is relative to alternative assets, holding everything else unchanged, the more _________ and the ______
ambiguous
A Business cycle contraction causes a decrease in expected profit opportunities and a decrease in wealth. Therefore, the bond supply curve as well as the demand curve shifts to the left. As a result, the change in bond prices and interest rates are _______.
Ambiguous increases
A Business cycle expansion is _____ on interest rates, but the quantity of bonds traded _______
higher level
A ______ of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right as people hold more cash balances
right but by a lesser amount rises
A business cycle expansion shifts the bond supply curve right and shifts the bond demand curve _______ so the price of bonds falls and the equilibrium interest rate _______
decrease left
A decrease in expected inflation causes the supply of bonds to _____ and the supply curve to shift to the ______
uncertain.
A rise in expected inflation shifts the bond demand curve left and shifts the bond supply curve right, causing the price of bonds to fall and the equilibrium interest rate to rise. The effect on quantity traded of bonds is ______
increase right
A rise in the price level causes the demand for money at each interest rate to ______ and the demand curve to shift to the ______
quantity demanded (or supplied) changes at each given price (or interest rate)
A shift in the demand (or supply) curve occurs when the ________ of the bond in response to a change in some other factor besides the bond's price or interest rate.
interest rate.
A shift of the supply curve to the right lowers the price of the bonds while increasing the ________
increase
An ______ in expected inflation causes the supply of bonds to increase and the supply curve for bonds to shift to the right
increase
An ______ in the expected rate of inflations lowers the expected return for bonds, causing the demand to decline and the demand curve to shift to the left.
Increase right
An increase in the expected inflation rate causes the supply of bonds to ____ and the supply curve to shift to the _____, everything else held constant
rise right
An increase in the riskiness of alternative assets causes the demand for bonds to _____ and the demand curve to shift to the _____
fall left
An increase in the riskiness of bonds causes the demand for bonds to _____ and the demand curve to shift to the ______
more attractive.
An increase in the volatility of prices in another asset market, such as the stock market, would make bonds _______
only movement along the curve, not a shift
Anytime prices or interest rates change there is _________
vertical line to show it is not affected by interest rates
Assume that the supply of money is controlled by the central bank. The supply curve will be a __________
higher: an inverse relationship
At lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is ______. There is a _______ relationship
interest rates and quantity supplied prices and quantity supplied
At lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower, so there is a negative relationship between __________. " But! there is a positive relationship between __________
quantity of bonds supplied.
Decreases in the price of bonds increases the interest rate and decreases the ________
Left rises
Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ___ and the interest rate ____
Left rises
Everything else held constant, when stock prices become less volatile, the demand curve for bonds shift to the _____ and the interest rate ____
positively related An increase in an assets expected return relative to that of an alternative asset raises the quantity demanded of that asset
Holding all other factors constant, The quantity demanded of an asset is _______ to its expected return relative to alternative assets
positively related The more liquid an asset is relative to alternative assets, the more desirable it is and the greater the quantity demanded will be
Holding all other factors constant, the quantity demanded of an asset is _______ to its liquidity relative to alternative assets
negatively related If an assets risk rises relative to that of alternative assets, its quantity demanded will fall
Holding all other factors constant, the quantity demanded of an asset is ________ to the risk of its returns relative to alternative assets
Decrease left
Holding the expected return on bonds constant, an increase in the expected return on common stocks would _____ the demands for bonds, shifting the demand curve to the _______
demand for bonds the right
If households save more, wealth increases so the ________ rises and the demand curve for bonds shifts to _____
less cash
If interest rates rise, people hold _______. The expected return on money falls relative to the expected return on bonds.
fall fall
If people began to think that interest rates would be higher next year than they originally anticipated, the expected returns today on long-term bonds would ______, and the quantity demanded would _____ at each interest rate.
fall the left
If people save less, wealth and demand for bonds _____, and the demand curve shifts to ______
rise
If people started trading more in the bond market, and as a result it became easier to sell bonds quickly, the increase in their liquidity would cause the quantity of bonds demanded at each interest rate to ______
increases left
If prices in the bond market become more volatile, the risk associated with bonds_______, and bonds become a less attractive asset. The demand falls, and the demand curve shifts _____
rises
If the equilibrium bond price moves downward, the equilibrium interest rate _____
no interest, it has zero return
In the Liquidity Preference Framework Assumptions, Money offers _________
also in equilibrium (Bs = Bd)
If the market for money is in equilibrium (Ms = Md) then the bond market is _______
rises the right
In a business cycle expansion with growing wealth, the demand for and supply of bonds _____ and the demand and supply curve shifts to _____
Supply supply right
In a business cycle expansion, the _____ of bonds increases and the _____ curve shifts to the ____ as business investments are expected to be much more profitable
increase right
In a business cycle expansion, the amounts of goods and services being produced in the economy increase, so national income rises. When this occurs, businesses are more willing to borrow because they are likely to have many profitable investment opportunities for which they need financing. So, at any given bond price, the quantity of bonds that the firm wants to sell (the supply of bonds) will ______. The supply curve shifts to the _____
increases right
In a business cycle expansion, the supply of bonds _____ and the supply curve shifts to the ______
supply curve shifts to the left
In a recession, when far fewer profitable investment opportunities are expected, the supply of bonds falls and the _________
Falls the left
In a recession, when income and wealth are falling, the demand for bonds ______, and the demand curve shifts to ______
interest rate, there is some positive expected return
In the Liquidity Preference Framework Assumptions, Bonds have an _______
will be in equilibrium
In the Liquidity Preference Framework Assumptions, If one market is in equilibrium the other market ________
M1: currency + checkable deposits
In the Liquidity Preference Framework Assumptions, Money is composed of ______
fixed interest rates change
In the Liquidity Preference Framework Assumptions, the Central bank controls the money supply so the supply is ______ by the central bank. The Money supply does not change when ______
negatively related.
In the Liquidity Preference Framework Assumptions, the quantity of money demanded and interest rates are ________
lowers left
Increased liquidity of alternative assets ______ the demand for bonds and shifts the demand curve to the ______
decreases increasing
Increases in the price of bonds _______ interest rates while _______ the supply of bonds that firms are willing to offer.
negatively related.
Interest rates and bond prices are _______
number of buyers and sellers in the market
Liquidity depends on the depth and breadth of the market, the ________
amount of goods and services it can buy.
People care about the amount of money they hold in real terms, the __________
degree of uncertainty associated with the return on one asset relative to alternative assets
Risk is the _______
income and price level
Shifts in the demand for money are caused by 2 factors: _________
quantity demanded and price.
The DEMAND CURVE shows relationship between __________
rises, rise.
The Fisher effect states that when expected inflation ________ interest rates will ____
just one bond and one interest rate
The PORTFOLIO THEORY Assumption is that there is _____________, it does not distinguish between different bond types
criteria that are important when deciding how much of an asset to buy
The PORTFOLIO THEORY is the economic theory that outlines the __________
quantity supplied and price.
The SUPPLY CURVE shows the relationship between __________
large increases.
The US treasury issues bonds to finance government deficits. When these deficits are _____, the treasury sells more bonds, and the quantity of bonds supplied at each bond price _______
The Fisher effect
The _______ says that there is a positive relationship between expected inflation and nominal interest rates
cheaper increases
When real interest rates (R) fall for firms the real cost of borrowing decreases, making it _____ to supply bonds, so the supply of bonds _______
left
When the demand for bonds shifts to the _____, the price of bonds decreases while the interest rates increase.
increase decrease
When the demand for bonds shifts to the right, the price of bonds _____ while the interest rates _____
rise
When the price level increases, with the supply of money and other economic variables constant, interest rates will ______
no longer as valuable
When the price level rises, the same nominal quantity of money is _______, it can't be used to purchase as many real goods or services.
left
When the supply curve shifts to the _____ the price of bonds rises while the interest rate falls
a store of value
Why income would affect the demand for money: As an economy expands and income rises, wealth increases and people want to hold more money as _________
a medium of exchange
Why income would affect the demand for money: As an economy expands and income rises, people want to carry out more transactions using money as ________, and they also want to hold more money
excess demand rise
With _______ people want to buy more bonds than others are willing to sell, so the price of bonds will _______
excess supply fall
With ________, the quantity of bonds supplied exceeds the quantity of bonds demanded: people want to sell more bonds than others want to buy, so the price of bonds will _____
Suppliers
______ are the firms or the government, they sell bonds as a way of raising capital.
The Liquidity Preference Framework
_______ Is the Keynesian model that determines the equilibrium interest rate in terms of the supply of and demand for money rather than the supply of and demand for bonds.
Increased
_______ liquidity of bonds results in an increased demand for bonds, and the demand curve shifts to the right
Lower expected future
________ interest rates increase the demand for long-term bonds and shifts the demand curve to the right
MARKET EQUILIBRIUM
________ 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