Demand for an Asset Wealth Expected return…relative to alternative assets Risk—uncertainty of return—relative to alternative assets Liquidity—ease and.

Slides:



Advertisements
Similar presentations
Objectives At this point, we know
Advertisements

Lesson 10-2 Demand, Supply, and Equilibrium in the Money Market.
Understanding the Concept of Present Value
4.2 You have just won $10 million, $1 every year for the next 10 years. Discuss. 4.6 What is the yield to maturity of a $1,000 face value discount bond.
Chapter 15 Monetary policy
Bond Prices Zero-coupon bonds: promise a single future payment, e.g., a U.S. Treasury Bill. Fixed payment loans, e.g., conventional mortgages. Coupon Bonds:
Chapter 5 The Behavior of Interest Rates. © 2004 Pearson Addison-Wesley. All rights reserved 5-2 Interest rates are negatively related to the price of.
Chapter 4 Why Do Interest Rates Change?. Copyright © 2009 Pearson Prentice Hall. All rights reserved. 4-2 Chapter Preview In the early 1950s, short-term.
FNCE 3020 Financial Markets and Institutions Fall Semester 2005 Lecture 3 The Behavior of Interest Rates.
Chapter 5. The Behavior of Interest Rates
© 2008 Pearson Education Canada5.1 Chapter 5 The Behaviour of Interest Rates.
The Behaviour of Interest Rates
Chapter 5 The Behavior of Interest Rates. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-2 Determining the Quantity Demanded of an Asset.
Understanding Interest Rates
1 The Risk and Term Structure of Interest Rates Chapter 6.
The demand for money How much of their wealth will people choose to hold in the form of money as opposed to other assets, such as stocks or bonds? The.
The Behavior of Interest Rates
Lecture The Behavior of Interest Rates
© 2008 Pearson Education Canada5.1 Chapter 5 The Behaviour of Interest Rates.
Prepared by: Fernando Quijano and Yvonn Quijano 15 C H A P T E R Financial Markets and Expectations.
Chapter 5 The Behavior of Interest Rates
1 MONEY & BANKING Week 3: The behavior of Interest rates Chapter 5.
1 Lecture 10: Interest rate and liquidity preference Mishkin Ch 5 - part B page
Monetary Policy Section 5 Modules In Plain English--The Federal Reserve Video  Take notes  Focus on the Board of Governors (BoG) Federal Reserve.
ECO Global Macroeconomics TAGGERT J. BROOKS SPRING 2014.
Bonds, bond prices and interest rates Bonds, bond prices and interest rates Bond prices and yields Bond market equilibrium Bond risks Bond prices and yields.
Paul Bernd Spahn, Goethe-Universität Frankfurt/Main1 Lecture 4 UNDERSTANDING INTEREST RATES (2)
Chapter 4 Why Do Interest Rates Change?. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-1 Chapter Preview In the early 1950s, short-term.
THE BOND MARKET Frederick University The Bond Market Bond supply Bond demand Bond market equilibrium.
Macro Chapter 14 Presentation 2- Expansionary and Restrictive Monetary Policy.
16 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Interest Rates and Monetary Policy.
Module 31 Monetary Policy & the Interest Rate
Relation of Liquidity Preference Framework to Loanable Funds Keynes’s Major Assumption Two Categories of Assets in Wealth MoneyBonds 1.Thus:M s + B s =
Monetary Policy. Purpose Monetary policy attempts to establish a stable environment so the economy achieves high levels of output and employment. How.
Money & Banking Video 04—Interest Rates II The Behavior of Interest Rates (Chapter 5) Interest Rate Determination (Chapter 6) Hal W. Snarr 8/20/2015.
CHAPTER 15 MONETARY POLICY Monetary Policy, Real GDP, and the Price Level.
The Money Market and Monetary Policy
Demand for an Asset Wealth Expected return…relative to alternative assets Risk—uncertainty of return—relative to alternative assets Liquidity—ease and.
Chapter 4 Why Do Interest Rates Change?. Copyright © 2009 Pearson Prentice Hall. All rights reserved. 4-2 Chapter Preview In the early 1950s, short-term.
33 Monetary Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 15.
Chapter 19 The Demand for Real Money Balances and Market Equilibrium ©2000 South-Western College Publishing.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Chapter 5 The Behavior of Interest Rates.
Money & Banking - ECO Dr. D. Foster Interest Rates II: How rates are determined The Term Structure.
Chapter 4 Why Do Interest Rates Change?. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-2 Chapter Preview Although interest rates in.
 Expansion- The economy is steadily growing, employment & production are increasing and people are spending more.  Peak- Production, employment, spending,
Answers to Review Questions  1.What is a real money balance? If the nominal money supply increases 20 percent while prices increase 20 percent, what happens.
Module 32 Money Output & Prices in the Long Run. 1. What are the effects of an inappropriate monetary policy? 2. What is the concept of monetary neutrality?
Chapter 14 Presentation 1- Monetary Policy. Ways the Fed Controls the Money Supply 1. Open Market Operations (**Most used) 2. Changing the Reserve Ratio.
How does a change in money supply affect the economy? Relevant reading: Ch 13 Monetary policy.
1 Lecture 9: Interest rate and asset demand Mishkin Ch 5 – part A page
Interest Rate Theory FNCE 4070 Financial Markets and Institutions.
1 The Money Market and the Interest Rate. 2 The Demand For Money Demand for money does not mean how much money people would like to have. Rather, it means.
5 - 1 Chapter 5 The Behaviour of Interest Rates Four Determinants of Asset Demand 1. Wealth - the total resources owned by the individual, including.
Recall that an asset is a piece of property that is a store of value. Items such as money, bonds, stocks, art, land, hauses, farm equipment, and manufacturing.
Section 5. What You Will Learn in this Module Illustrate the relationship between the demand for money and the interest rate with a graph Explain why.
Chapter 4 Appendix 4 Supply and Demand in the Market for Money: The Liquidity Preference Framework.
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Money and Banking Lecture 14.
Money Demand KEYNES’ LIQUIDITY PREFERENCE THEORY.
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-1 Determining the Quantity Demanded of an Asset Wealth—the total resources owned by the.
1 Lectures 8 and 9 The Behavior of Interest Rates.
Lecture 4 The Behaviour of Interest Rates In this chapter, we examine the forces the move interest rates and the theories behind those movements. Topics.
Money and Banking Lecture 15.
The Behavior of Interest Rates
Chapter 5 The Behavior of Interest Rates
The Behaviour of Interest Rates
Chapter 4 The Meaning of Interest Rates
The Behavior of Interest Rates
The Behavior of Interest Rates
© 2008 Pearson Education Canada
THE BEHAVIOR OF INTEREST RATES
Presentation transcript:

Demand for an Asset Wealth Expected return…relative to alternative assets Risk—uncertainty of return—relative to alternative assets Liquidity—ease and speed an asset can be turned into cash—relative to alternative assets

Shifts in the Demand for Money Income Effect: Higher income  more stuff bought  demand for money at each interest rate increases Price-Level Effect: Rise in the price level  need more money to buy the same amount of stuff  the demand for money at each interest rate increases Monetary Base: Controlled by Fed Money Multiplier: (1 + c)/(c + r + e) We’ll assume M s controlled by Fed Shifts in the Supply of Money

Interest Rate and the Money Supply Liquidity effect: M s up lowers interest rates But M s up also increases output and prices Income effect: M s up  increased output  increased demand for money  interest rate up Price-Level effect: M s up  increased price level  increased demand for money  interest rate up Expected-Inflation effect: M s up  expectation of ongoing inflation (maybe)  interest rate up Since i = r + π e, if π and π e catches up as it must, i too Since (M/P) d = L(Y,i) is stable at each Y, (M/P) s must fall when π. P must rise faster than M.

4.2 You have just won $10 million, $1 every year for the next 10 years. Discuss. 4.6 What is the yield to maturity of a $1,000 face value discount bond that matures in 1 year and sells for $800? What if it matured in 2 years? 4.12 If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Which type of bond has greater interest rate risk? 4.19 Interest rates were lower in the mid-1980s than they were in the late 1970s, Yet many economists say that real interest rates were actually much higher in the mid-1980s. Does this make sense? 5.6 An important way in which the Fed decreases M s is by selling bonds to the public. Using a supply and demand analysis for bonds, show the effect on i. Using the liquidity preference framework, show the effect on i The Chairman of the Fed announces that interest rates will rise sharply next year. What will happen to corporate bond interest rates today? Explain.