Question

Employ the theory of asset demand to determine whether you would increase or decrease your quantity demanded of bonds in response to the following events. Explain.

a) Your grandmother dies and leaves you a bequest of $100,000.

b) Your brokerage firm lowers its commissions on stock transactions but keeps its commissions the same on bond transactions.

c) You are risk averse. You anticipate more volatility in future stock returns.

d) You become more pessimistic about future returns in the stock market.

Answer 1

a. Increase

With the increase in real income, more the likeliness and quantity of bonds will be bought ast it has a positive correlation with income.

b. Decrease

This makes stocks ( a substitute) more attractive than before when comeoared to bonds. This will increase the demand for stocks and decrease that of bonds .

c. Decrease

It's a case of negative expected returns which will decrease quantity demanded of bonds.

d. Increase

Stocks become less attractive , and thus more demand towards bonds.

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