Numerade

The Economics of Money, Banking, and Financial Markets

Frederic S. Mishkin

ISBN #9781292094182

11th Edition

614 Questions

42,466 Students Helped

Summary

This section examines how the quantity demanded for assets is determined by factors such as wealth, expected returns, risk, and liquidity. It introduces the theory of portfolio choice and applies a traditional supply and demand analysis to the bond market to establish equilibrium bond prices and interest rates. Additionally, it discusses the liquidity preference framework for determining interest rates via money supply and demand, and explores the complex interplay of liquidity, income, price-level, and expected-inflation effects on interest rates. The Fisher effect is highlighted, emphasizing that expected inflation has a direct influence on nominal interest rates.

Learning Objectives

Key Concepts

CONCEPT

DEFINITION

Definition: The study of how equilibrium levels of output and inflation are determined by the interaction of aggregate demand (planned spending) and aggregate supply (the economy’s capacity).

The study of how equilibrium levels of output and inflation are determined by the interaction of aggregate demand (planned spending) and aggregate supply (the economy’s capacity). •

Example 1

Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations: a. Your wealth falls. b. You expect the stock to appreciate in value. c. The bond market becomes more liquid. d. You expect gold to appreciate in value. e. Prices in the bond market become more volatile.

Example 2

Explain why you would be more or less willing to buy a house under the following circumstances: a. You just inherited $\$ 100,000$. b. Real estate commissions fall from $6 \%$ of the sales price to $5 \%$ of the sales price. c. You expect Microsoft stock to double in value next year. d. Prices in the stock market become more volatile. e. You expect housing prices to fall.

Example 3

Explain why you would be more or less willing to buy gold under the following circumstances: a. Gold again becomes acceptable as a medium of exchange. b. Prices in the gold market become more volatile. c. You expect inflation to rise, and gold prices tend to move with the aggregate price level. d. You expect interest rates to rise.

Example 4

Explain why you would be more or less willing to buy long-term AT\&T bonds under the following circumstances: a. Trading in these bonds increases, making them easier to sell. b. You expect a bear market in stocks (stock prices are expected to decline). c. Brokerage commissions on stocks fall. d. You expect interest rates to rise. e. Brokerage commissions on bonds fall.