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1、Copyright 2010 Pearson Addison-Wesley. All rights reserved.Chapter 5The Behavior of Interest RatesCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-2Determining the Quantity Demanded of an AssetWealth: the total resources owned by the individual, including all assetsExpected Return: the r
2、eturn expected over the next period on one asset relative to alternative assetsRisk: the degree of uncertainty associated with the return on one asset relative to alternative assetsLiquidity: the ease and speed with which an asset can be turned into cash relative to alternative assetsCopyright 2010
3、Pearson Addison-Wesley. All rights reserved.5-3Theory of Asset DemandHolding all other factors constant:1.The quantity demanded of an asset is positively related to wealth2.The quantity demanded of an asset is positively related to its expected return relative to alternative assets3.The quantity dem
4、anded of an asset is negatively related to the risk of its returns relative to alternative assets4.The quantity demanded of an asset is positively related to its liquidity relative to alternative assetsCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-4Summary Table 1 Response of the Quan
5、tity of an Asset Demanded to Changes in Wealth, Expected Returns, Risk, and LiquidityCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-5Supply and Demand for BondsAt lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher: an inverse relationshipAt
6、lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower: a positive relationshipCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-6FIGURE 1 Supply and Demand for BondsCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-7Market EquilibriumOcc
7、urs when the amount that people are willing to buy (demand) equals the amount that people are willing to sell (supply) at a given priceBd = Bs defines the equilibrium (or market clearing) price and interest rate. When Bd Bs , there is excess demand, price will rise and interest rate will fallWhen Bd
8、 Bs , there is excess supply, price will fall and interest rate will riseCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-8Shifts in the Demand for BondsWealth: in an expansion with growing wealth, the demand curve for bonds shifts to the right Expected Returns: higher expected interest
9、rates in the future lower the expected return for long-term bonds, shifting the demand curve to the leftExpected Inflation: an increase in the expected rate of inflations lowers the expected return for bonds, causing the demand curve to shift to the leftRisk: an increase in the riskiness of bonds ca
10、uses the demand curve to shift to the leftLiquidity: increased liquidity of bonds results in the demand curve shifting rightCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-9Summary Table 2 Factors That Shift the Demand Curve for BondsCopyright 2010 Pearson Addison-Wesley. All rights res
11、erved.5-10FIGURE 2 Shift in the Demand Curve for BondsCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-11Shifts in the Supply of BondsExpected profitability of investment opportunities: in an expansion, the supply curve shifts to the rightExpected inflation: an increase in expected infla
12、tion shifts the supply curve for bonds to the rightGovernment budget: increased budget deficits shift the supply curve to the rightCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-12Summary Table 3 Factors That Shift the Supply of BondsCopyright 2010 Pearson Addison-Wesley. All rights re
13、served.5-13FIGURE 3 Shift in the Supply Curve for BondsCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-14FIGURE 4 Response to a Change in Expected InflationCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-15FIGURE 5 Expected Inflation and Interest Rates (Three-Month Treasury
14、 Bills), 19532008Source: Expected inflation calculated using procedures outlined in Frederic S. Mishkin, “The Real Interest Rate: An Empirical Investigation,” Carnegie-Rochester Conference Series on Public Policy 15 (1981): 151200. These procedures involve estimating expected inflation as a function
15、 of past interest rates, inflation, and time trends.Copyright 2010 Pearson Addison-Wesley. All rights reserved.5-16FIGURE 6 Response to a Business Cycle ExpansionCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-17FIGURE 7 Business Cycle and Interest Rates (Three-Month Treasury Bills), 19
16、512008Source: Federal Reserve: www.federalreserve.gov/releases/H15/data.htm.Copyright 2010 Pearson Addison-Wesley. All rights reserved.5-18The Liquidity Preference FrameworkCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-19FIGURE 8 Equilibrium in the Market for MoneyCopyright 2010 Pears
17、on Addison-Wesley. All rights reserved.5-20Demand for Money in the Liquidity Preference FrameworkAs the interest rate increases:The opportunity cost of holding money increasesThe relative expected return of money decreasesand therefore the quantity demanded of money decreases.Copyright 2010 Pearson
18、Addison-Wesley. All rights reserved.5-21Shifts in the Demand for MoneyIncome Effect: a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the rightPrice-Level Effect: a rise in the price level causes the demand for money at each inte
19、rest rate to increase and the demand curve to shift to the rightCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-22Shifts in the Supply of MoneyAssume that the supply of money is controlled by the central bankAn increase in the money supply engineered by the Federal Reserve will shift th
20、e supply curve for money to the rightCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-23FIGURE 9 Response to a Change in Income or the Price LevelCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-24FIGURE 10 Response to a Change in the Money SupplyCopyright 2010 Pearson Addiso
21、n-Wesley. All rights reserved.5-25Summary Table 4 Factors That Shift the Demand for and Supply of MoneyCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-26Everything Else Remaining Equal?Liquidity preference framework leads to the conclusion that an increase in the money supply will lower
22、 interest rates: the liquidity effect.Income effect finds interest rates rising because increasing the money supply is an expansionary influence on the economy (the demand curve shifts to the right).Copyright 2010 Pearson Addison-Wesley. All rights reserved.5-27Everything Else Remaining Equal?Price-
23、Level effect predicts an increase in the money supply leads to a rise in interest rates in response to the rise in the price level (the demand curve shifts to the right).Expected-Inflation effect shows an increase in interest rates because an increase in the money supply may lead people to expect a
24、higher price level in the future (the demand curve shifts to the right).Copyright 2010 Pearson Addison-Wesley. All rights reserved.5-28Price-Level Effect and Expected-Inflation EffectA one time increase in the money supply will cause prices to rise to a permanently higher level by the end of the yea
25、r. The interest rate will rise via the increased prices.Price-level effect remains even after prices have stopped rising. A rising price level will raise interest rates because people will expect inflation to be higher over the course of the year. When the price level stops rising, expectations of i
26、nflation will return to zero.Expected-inflation effect persists only as long as the price level continues to rise.Copyright 2010 Pearson Addison-Wesley. All rights reserved.5-29FIGURE 11 Response over Time to an Increase in Money Supply GrowthCopyright 2010 Pearson Addison-Wesley. All rights reserved.5-30FIGURE 12 Money Growth (M2, Annual Rate) and Interest Rates (Three-Month Treasury Bills),19502008Sources: Federal Reserve: www.federalreserve.gov/releases/h6/hist/h6hist1.txt.
