THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 121
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CHAPTER 5
The Behaviour of Interest Rates 89
To see how a change in each of these factors (holding all other factors constant) can
shift the demand curve, let us look at some examples. (As a study aid, Table 5-2
summarizes the effects of changes in these factors on the bond demand curve.)
TA B L E 5 - 2
Factors That Shift the Demand Curve for Bonds
Variable
Wealth
Change in
Variable
Change in Quantity
Demanded at Each
Bond Price
*
*
Shift in
Demand Curve
P
B d1
B d2
B
Expected interest rate
*
+
P
B d2
B d1
B
Expected inflation
*
+
P
B d2
B d1
B
Riskiness of bonds
relative to other assets
P
*
+
B d2
B d1
B
Liquidity of bonds
relative to other assets
P
*
*
B d1
B d2
B
Note: Only increases (*) in the variables are shown. The effect of decreases in the variables on the change in demand
would be the opposite of those indicated in the remaining columns.
