EC223 Lecture Notes - Lecture 9: Government Budget Balance, Opportunity Cost, Ceteris Paribus
Document Summary
Wealth the total resources owned by the individual, including all assets. Expected return the return expected over the next period on one asset relative to alternative assets. Risk the degree of uncertainty associated with the return on one asset relative to alternative assets. Liquidity the ease and speed with which an asset can be turned into cash relative to alternative assets. Changing one variable at a time to see how it affects demand holding all other factors constant. Response of the quantity of an asset demanded to changes in wealth, expected. Holding all else constant, lower prices (higher interest rates) increases the quantity demanded of bonds i=ytm=(f-p)/p. Principal goes down, yield to maturity goes up. Interest rate and quantity demanded are positively related. Holding all else constant, lower prices (higher interest rates), decreases the quantity supplied of bonds. Interest rate and quantity supplied are positively related.
