Financial Markets and Institutions (2-downloads)

1. Expected profitability of investment opportunities

2. Expected inflation

3. Government budget

We will look at how the supply curve shifts when each of these factors changes

(all others remaining constant). (As a study aid, Table 4.3 summarizes the effects

of changes in these factors on the bond supply curve.)

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Part 2 Fundamentals of Financial Markets

Expected Profitability of Investment Opportunities

The more profitable plant

and equipment investments that a firm expects it can make, the more willing it will

be to borrow to finance these investments. When the economy is growing rapidly,

as in a business cycle expansion, investment opportunities that are expected to be

profitable abound, and the quantity of bonds supplied at any given bond price

will increase (see Figure 4.3). Therefore, in a business cycle expansion,