Exam 4: Why Do Interest Rates Change

When the demand for bonds ________ or the supply of bonds ________, interest rates fall.

In his liquidity preference framework, Keynes assumed that money has a zero rate of return; thus, when interest rates ________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to ________.

Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets.

When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________.

Holding everything else constant, an increase in the money supply causes

The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds.