Financial Markets and Institutions (2-downloads)

2. Expected return (the return expected over the next period) on one asset

relative to alternative assets

3. Risk (the degree of uncertainty associated with the return) on one asset

relative to alternative assets

4. Liquidity (the ease and speed with which an asset can be turned into cash)

relative to alternative assets

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Chapter 4 Why Do Interest Rates Change?

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1

Although it is possible that some assets (called inferior assets) might have the property that the

quantity demanded does not increase as wealth increases, such assets are rare. Hence we will always

assume that demand for an asset increases as wealth increases.

Wealth

When we find that our wealth has increased, we have more resources available with

which to purchase assets and so, not surprisingly, the quantity of assets we demand

increases.

1

Therefore, the effect of changes in wealth on the quantity demanded of

an asset can be summarized as follows: Holding everything else constant, an