Determining the Quantity Demanded of an Asset
Wealth—the total resources owned by the individual, including all assets
Expected Return—the return expected over the next period on one asset relative to alternative assets
Risk—the degree of uncertainty associated with the return on one asset relative to alternative assets
Liquidity—the ease and speed with which an asset can be turned into cash relative to alternative assets
Theory of Asset Demand
Holding all other factors constant:
The quantity demanded of an asset is positively related to wealth
The quantity demanded of an asset is positively related to its expected return relative to alternative assets
The quantity demanded of an asset is negatively related to the risk of its returns relative to alternative assets
The quantity demanded of an asset is positively related to its liquidity relative to alternative assets
Supply and Demand for Bonds
At lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher—an inverse relationship
At lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower—a positive relationship
