The Behavior of Interest Rates - Changes in Equilibrium Interest Rates
8 important questions on The Behavior of Interest Rates - Changes in Equilibrium Interest Rates
When does the demand for bonds rise?
- Increasing wealth
- Lower expected interest rates in the future
- The lower expected inflation
- A decrease in the riskiness of bonds
- An increase in liquidity
What happens when there is an increase in liquidity of alternative assets?
When does the supply for bonds fall?
- In a business cycle recession (when there are far fewer expected profitable investment opportunities)
- A decrease in expected inflation
- Lower government deficits (government surpluses)
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When does supply for bonds rise?
- In a business cycle expansion (Expected Profitability of Investment Opportunities)
- When there an increase is expected inflation
- When there are higher government deficits
What happens when expected inflation rises from 5% to 10%?
The amount of goods and services for the country is increasing, so national income is increasing. What is the expected effect on interest rates?
2. And shifts the bond demand curve rightward, but by a lesser amount.
3. So the price of bonds falls and the equilibrium interest rate rises.
What happen when the money supply increases?
Milton Freeman on liquidity effect: what does he quote?
BUT: a change in the money supply might not leave everything else equal!
The question on the page originate from the summary of the following study material:
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- Never study anything twice again
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