Key In-Class Discussion Questions (M5):

How can the standard demand and supply curve analysis from Principles of Micro 101 be applied to bond markets to determine equilibrium bond prices and interest rates? What kinds of factors cause movements along the demand and supply curves? What kinds of factors cause shifting of the demand and supply curves? How is the equilibrium bond price (interest rate) affected by these shifts? In what sense is the analysis "short run"? (Web Browse Question) Can we approach the modeling of financial markets in a more dynamic way? (Most definitely yes! For example, we can grow financial markets "from the bottom up." Take a look at some exciting new developments along these lines reported on at http://www.econ.iastate.edu/tesfatsi/afinance.htm)

Key Issues (M5):

Factors causing movements along the bond demand curve Factors causing the bond demand curve to shift Factors causing movements along the bond supply curve Factors causing the bond supply curve to shift Predicted movements in the price of bonds in response to an excess demand or supply of bonds Predicted effects on bond market equilibrium of changes in various factors such as wealth, expected interest rates, expected inflation, and the government deficit Relationship between bond market analysis and loanable funds market analysis Predicted movements in the interest rate on bonds in response to an excess demand or supply of loanable funds In what sense is the demand and supply analysis in Mishkin (Chapter 5) partial equilibrium in nature? In particular, why must his caution "all other economic variables are held constant" given at the beginning of Chapter 5 always be kept in mind when considering the practical application of the predictions he obtains from his demand and supply analysis of the bond market?