CHAPTER V

asset market approach

An approach to determining asset pricing making use of of stocks and assets rather than cash flow

demand curve

The line depicting the level of demand at each price level.

excess demand

A situation in which the quantity demanded is greater than the quantity supplied.

excess supply

A situation in which the quantity supplied is greater than the quantity demanded

expected return

the expected return of one asset relative to another

fisher effect

when expected inflation rises interest rates will as well

liquidity

The relative ease of conversion into cash

liquidity preference framework

Keneysian model predicting the equilibrium IR based off of supply and demand of money

risk

degree of uncertainty of one asset relative to another

supply curve

curve depicting the relationship between quantity supplied and price.

theory of portfolio choice

how much of an asset will people want to hold, ceteris paribus

wealth

total resources owned by the individual. Is equal to bonds + money

When wealth increases, bond demand shifts

right

When expected interest rates rise the demand for bonds shifts

left

when expected inflation increases, bond demand shifts

left

when relative risk increases bond demand shifts

left

when bond liquidity increases bond demand shifts

right

When profitability of investment opportunity increases, bond supply shifts

right

when expected inflation increases bond supply shifts

right

when government budget deficits increase bond supply shifts

right

Income effect - demand for money

As income rises, the demand curve for money shifts right

Price level effect

A rise in the PL causes a shift in the demand curve for money to the right