The Behavior Of Interest Rates85

Preview 85

Determinants of Asset Demand 85

Wealth 86

Expected Returns 86

Risk 87

Liquidity 87

Theory of Asset Demand 87

Supply and Demand in the Bond Market 87

Demand Curve 88

Supply Curve 90

Market Equilibrium 90

Supply and Demand Analysis 91

Loanable Funds Framework 91

Changes in Equilibrium Interest Rates 93

Shifts in the Demand for Bonds 93

Shifts in the Supply of Bonds 97

Application Changes in the Equilibrium Interest Rate Due to Expected Inflation or Business Cycle Expansions 99

Changes in Expected Inflation: The Fisher Effect 99

Business Cycle Expansion 100

Application Explaining Low Japanese Interest Rates 103

Application Reading the Wall Street Journal "Credit Markets" Column 103

Following the Financial News The "Credit Markets" Column 104

Supply and Demand in the Market for Money: The Liquidity

Preference Framework 105

Changes in Equilibrium Interest Rates in the Liquidity Reference Framework 107

Shifts in the Demand for Money 107

Shifts in the Supply of Money 108

Application Changes in the Equilibrium Interest Rate Due to Changes in Income, the Price Level, or the Money Supply 108

Changes in Income 108

Changes in the Price Level 108

Changes in the Money Supply 109

Following the Financial News Forecasting Interest Rates 111

Application Money and Interest Rates 112

Does a Higher Rate of Growth of the Money Supply Lower Interest Rates? 114

Summary, Key Terms, Questions and Problems, and Web Exercises 117

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