What is money? A comparative approach to measuring money
18 important questions on What is money? A comparative approach to measuring money
What happens in the bond market when there is excess supply?
Why is the asset market approach preferred by economists when analyzing financial markets?
When does a shift in the demand curve happen in the bond market?
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What are the factors causing shifts in the demand for bonds?
- Rising wealth leads to increased demand for bonds, shifting the demand curve right.
- Declining wealth in a recession decreases bond demand, shifting the curve left.
- Expected returns:
- Identical expected return and interest rate for one-year discount bonds.
- Differences in expected return for bonds with maturities exceeding one year based on interest rate expectations.
- Higher future interest rates decrease expected return for long-term bonds.
- Lower future interest rates increase demand for long-term bonds.
- Increased expected inflation lowers expected return, decreasing demand.
What causes shifts in the supply of bonds?
- Wealth growth during an expansion boosts bond demand and shifts the demand curve right.
- Equilibrium interest rate can rise or fall based on the magnitude of the shifts in the supply and demand curves.
- Expected inflation:
- Decreased borrowing costs raise bond supply.
- Rising inflation decreases bond demand, shifting the demand curve right and raising the equilibrium interest rate.
- Government deficit:
- Higher deficits increase bond supply.
- Negative inflation:
- Increases bond demand due to falling real asset returns.
- Raises real interest rates, decreasing the supply of bonds.
How does an increase in the expected rate of inflation affect the demand for bonds?
- This causes a decline in bond demand, shifting the demand curve to the left.
What happens to bond supply when there are many profitable investment opportunities in a business cycle expansion?
- This increases bond supply, shifting the supply curve to the right.
How does a decline in borrowing costs impact the supply of bonds?
- This shift of the supply curve to the right increases bond supply.
Explain the impact of rising inflation on the demand for bonds.
- It leads to a rightward shift of the demand curve, lowering the equilibrium interest rate.
In the liquidity preference framework, what determines the equilibrium interest rate? What is the condition to determine this equilibrium?
- Condition: Bond supply minus bond demand equals money demand minus money supply
Why is the bond supply and demand framework preferred for analyzing expected inflation changes, while the liquidity preference framework is used for analyzing income, price level, and money supply changes?
- Liquidity preference framework simpler for changes in income, price level, money supply
What happens to the quantity of money demanded when the interest rate increases in the liquidity preference framework? Explain the movement of the demand curve for money.
- Demand curve for money slopes downward when interest rate rises
Describe the characteristics of the money supply curve in the liquidity preference framework.
- Represents a fixed quantity determined by the central bank
How does the liquidity preference framework explain the adjustment process when there is an excess money supply?
- Buying bonds increases bond prices and lowers interest rates towards equilibrium
What factors cause shifts in the demand for money in the liquidity preference framework? Explain the income effect and the price-level effect.
- Price-level effect: higher price level increases money demand at each interest rate
How does the supply of money affect the liquidity preference framework? What happens when there is an increase or decrease in the supply of money?
How does an increase in the money supply affect interest rates according to liquidity effect, income effect, and price level effect?
- Income Effect: Higher money supply leads to increased interest rates due to higher income.
- Price Level Effect: More money supply results in higher interest rates due to higher price level.
Describe the impact of a one-time increase in the money supply on the price level and the continual rise of the price level.
- Only a higher rate of money supply growth results in continually rising price levels.
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