Ch 5. Behavior of Interest Rate
Ch 5. Behavior of Interest Rate ECON 3303
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This 2 page Class Notes was uploaded by Ashlie Meckley on Monday September 28, 2015. The Class Notes belongs to ECON 3303 at University of Texas at Arlington taught by Chi-Young Choi in Summer 2015. Since its upload, it has received 100 views.
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Date Created: 09/28/15
Ch 5 Behavior of lntrest Rate Lecture Dates September 22nCI Market Equilibrium Excess Demand price will rise and interest rates will fall Excess Suoplv price will fall and interest rates will rise Centeris Paribus all else remains the same 0 Supply Curve Shift Factors negative shift to the left shift to the right Barrows are bond issuers shift right Increased expected investment opportunity shift right Increase in ation Excess Emmy shift right Increased government 39 fig de Cit Equ il ibriiium Demand Curve Shift Factors negative shift to v the left shift to the right 7 7 7 7 77 u Savers are lenders shift right Ina39eased income Pegggtnd wealth i shift left Increased expected it WWW Gapyrig i am a rryra lnpciiainm returns future in ation and futures interest rate shift left Increased risk shift right Increased Liquidity Price of Bond reciprocal to interest rate 0 Flight amp Quality risky assets get moved to safer investments Higher risk higher interest rate Greek bond market gets risker then the demand for German bonds will inCrease Price G e r m Price G e k ilII Quantityr ill Quantity 0 Spread difference between two interest rates 0 Expected in ation increases then Nominal interest increases ProCvclical vs Counter Cyclical Elusiness cycle F39rocycica expenditure k 39 Neutral expenditure Countercycical expenditure I I Moves same my direction as GDP D t f m q lb m percent of potential GDP Boom expansion Recession quoth h SI IIJ L ICl I II L39IJIIII Counter Moves opposite direction as GDP Nominal Interest Rate is ProCyclical Bond Price is CounterCyclical Business Cycle 0 During Boom Supply increases Demand Increases nterest Rate increase Price Decreases when supply shifts more than demand Operational Twist Fed sold 400 billion short term bonds Supply increase 0 Sell Supply Fed bought 400 billion long term bonds Demand increase 0 Buv Demand Short Term tbill Long Term Market P ce TPI p 5 Price Price 5 51 Price Decrease Increase W m P Interest 3 1 m 1p m Increase 391 Decreases E I D D1 1 D1 Q Q Quantity Quantity I Theorv into Practice TIP o Yield interest rate Treasurv Euro Dollar Spread TED 0 Peaks show problems Dump risky to gain safer assets lmportance Bond Market is where interest rates are determined Income Effect higher level of income shifts demand curve right Price level effect rise in price level shifts demand curve right