What determines the behavior of interest rates?
The interaction of bond demand and supply.
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| Term | Definition |
|---|---|
| What determines the behavior of interest rates? | The interaction of bond demand and supply. |
| When does bond demand increase? | When wealth rises or expected returns increase. |
| When does bond demand decrease? | When inflation expectations rise. |
| When does bond supply increase? | When expected profitability or inflation rises. |
| What happens to interest rates during a business expansion? | They rise due to higher bond supply. |
| What happens to interest rates during a recession? | They fall due to lower bond supply and higher demand. |
| What is the liquidity preference framework? | A model that explains interest rate movements using money supply and demand. |
| What happens when the money supply increases? | Interest rates fall. |
| What happens when income increases? | Interest rates rise. |
| What happens when price level increases? | Interest rates rise. |
| What is the expected-inflation effect? | Higher expected inflation shifts bond demand left and supply right, raising rates. |
| What is the Fisher effect? | A one-for-one increase in nominal interest rate with expected inflation. |
| What is liquidity effect? | Higher money supply lowers interest rates. |
| What is the income effect? | Higher income from money growth raises interest rates. |
| What is the price-level effect? | Higher prices raise money demand and interest rates. |
| What is the expected-inflation effect on rates? | It raises nominal interest rates. |
| What is the liquidity trap? | A situation where rates are so low that monetary policy becomes ineffective. |
| What is the difference between short-run and long-run effects of money growth? | Short-run lowers rates |
| Why do interest rates fluctuate? | Changes in expectations about inflation and economic activity. |
| What does an increase in money demand do to interest rates? | Raises them. |
| What does a decrease in money demand do to interest rates? | Lowers them. |
| How does government deficit affect interest rates? | Increases bond supply, raising rates. |
| How does economic expansion affect interest rates? | Increases bond supply and demand |
| What is a business cycle expansion? | A period of rising output and income. |
| What happens to bond demand when inflation rises? | It decreases. |
| What is the speculative demand for money? | Holding money to profit from expected interest rate changes. |
| What is the transactions demand for money? | Money held for everyday purchases. |
| How does monetary policy influence rates? | By changing money supply and expectations. |
| What is the impact of inflation expectations on real interest rates? | They move inversely |
| Why might the liquidity effect dominate in the short run? | Because prices and expectations adjust slowly. |
| When does the price-level effect dominate? | When inflation expectations are fully incorporated. |
| What happens if money supply increases permanently? | Rates eventually rise as inflation expectations increase. |
| How do bond prices relate to interest rate movements? | They move inversely. |
| What is the term structure of interest rates? | The relationship between bond yields and maturities. |
| How does uncertainty affect bond markets? | Higher uncertainty raises risk premiums and interest rates. |
| What is the opportunity cost of holding money? | The interest foregone by not holding bonds. |
| What happens to rates when government issues more debt? | They increase due to greater bond supply. |
| How does income growth affect bond demand? | It raises demand for money and bonds. |
| What is the equilibrium rate determined by? | The intersection of bond demand and supply curves. |
| What are the three effects of an increase in money supply? | Liquidity, income, and price-level effects. |