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:
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Shifts in the Supply of Money
But Ms up also increases output and prices
Since i = r + πe, if π and πecatches up as it must, i too
Since (M/P)d = L(Y,i) is stable at each Y, (M/P)smust fall when π . P must rise faster than M.
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.
5.17. The Chairman of the Fed announces that interest rates will rise sharply next year. What will happen to corporate bond interest rates today? Explain.