ECON201 Lecture Notes - Lecture 7: Government Budget Balance, Demand Curve, Liquidity Preference

• School: University of Waterloo
• Department: Economics
• Course: ECON201
• Professor: Predrag Rajsic

Document Summary

1. identify the factors that affect the demand for assets. 2. draw the demand and supply curves for the bond market, and identify the equilibrium interest rate. Lower prices (higher interest rates) will increase the quantity demanded for bonds. Lower prices (high interest rates) will decrease the quantity supplied for bonds. 3. use the liquidity preference framework to connect the bond market and the money market. Based on the fishe(cid:396) e(cid:395)uation, when e increase, (r) will decrease and the demand for bonds will decrease. A rise in expected inflation will shift the demand curve to the left and shift the supply curve to the right. The result is an increased equilibrium interest rate. During business cycle expansions, profitable investment opportunities incentivize firms to borrow so the supply of bonds will increase. As wealth is likely to increase during these expansions, the theory of portfolio choice thus tells that the demand for bonds will increase as well.