Long-term Bonds, Capital Gains and Liquidity Preference

Abstract

The definition of wealth in Model PC in Chapter 4 comprised only two assets, money and bills. In this chapter a third asset, long-term government bonds, is introduced and this will provide an opportunity to discuss the notion of liquidity preference — hence the name Model LP — and also to introduce capital gains and losses into the system of accounts. An important feature of the new model will be that an increase in long-term interest rates will have a short-run negative effect on demand.