the total resources owned by the individual, including all assets

wealth 
T he quantity demanded of an asset is positively related to wealth

the return expected over the next period on one asset relative to alternative assets
expected return 
T he quantity demanded of an asset is positively related to its expected return relative to alternative asset

the degree of uncertainty associated with the return on one asset relative to alternative assets
risk 
Determinants of asset Demand T he quantity demanded of an asset is negatively related to the risk of its returns relative to alternative assets

the ease and speed with an asset can be turned into cash alternative assets
liquidity
T he quantity demanded of an asset is positively related to its liquidity relative to alternative assets

Wealth  growing wealth (in expansion) -> the demand curve f or bonds shif ts to the right

expected returns expected interest rates in the f uture rise -> the expected return f or long-term bonds f all -> the demand curve shif t lef t 

expected inf lation  the expected rate of inf lations increase -> the expected return f or bonds reduce -> the demand curve shif t lef t 

risk the riskiness of bonds increase-> the demand curve shif t lef t 

liquidity  the liquidity of bonds increase -> the demand curve shif t right

expected prof itability of investment opportunities  in an expansion -> the supply curve shif ts right

Supply and demand in the bond market expected inf laction  the expected inf lation increase -> the supply curve shif t right 

Government budget  budget def icits increase -> the supply curve shif t right 

Bd= Bs -> def ines the equilibrium (or market clearing) price and interest rate

Bd > Bs -> there is excess demand, price will rise and interest rate will f all.

Bd < Bs -> there is excess supply, price will f all and interest rate will rise.

supply and demand f or bonds

THE BEHAVIOR OF INTEREST RATES

income ef f ect  higher level of income -> demand f or money at each interest rate increase -> demand curve shif t right 
shif t in the demand f or money
price-level ef f ect price level rise -> demand f or money at each interest rate increase -> demand curve shif t right 

shif ts in the supply of money the money supply (engineered by the Federal Reserve) increase -> the supply curve f or money shif t right 

Bs+ Ms= Bd+ Md 

Supply and demand in the Market for money
the market money is in equilibrium (Ms = Md) -> bond market is in equilibrium (Bs = Bd)

equilibrium in the market f or money 

lower interest rates (the liquidity ef f ect)

income ef f ect: national income and wealth rise -> rise in interest rates (demand curve shif ts right)

rise in the price level -> money demand increase -> rise in interest rates
liquidity pref erence f ramework: increase in money supply  
price-level ef f ect
remains even af ter prices have stopped rising.

expect a higher price level in the f uture -> demand curve shif t right -> increase in interest rates
expected-inf lation ef f ect
persists only as long as the price level continues to rise.

liquidity ef f ect larger than other ef f ects

Topic branch 4

liquidity ef f ect smaller than other ef f ects and slow

adjustment of expected inf lation

liquidity ef f ect smaller than expected-inf lation

ef f ect and f ast adjustment of expected inf lation