The bond market and money market are linked through wealth. According to John Ma

Question

The bond market and money market are linked through wealth. According to John Maynard Keynes's liquidity preference framework, wealth is divided between two assets: interest-bearing bonds and non-interest-bearing money. Total wealth equals the quantity of bonds plus the quantity of money in the economy: Wealth = Quantity of Bonds + Quantity of Money In equilibrium, the quantity of bonds supplied equals the quantity demanded. Likewise, the quantity of money supplied equals the quantity demanded in money market equilibrium. Therefore: W = Bs + Ms = Bd + Md Rewriting this expression yields: Bs - Bd = Md - Ms For the following question, consider how a change in the composition of wealth affects the bond and money markets. Suppose that people decide to hold more of their wealth as money. True or False: When people shift their wealth from money into bonds, this causes an increase in the equilibrium interest rate. True False

Explanation / Answer

False as When people shift their wealth from money into bonds, this causes an decrease in the equilibrium interest rate

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---