Wealth - Bond Market and Liquidity Preference Framework

Question

I've been told that an increase in wealth will lead to an increase in both the demand for Bonds determined by the Theory of Asset Demand. This should shift the bond curve to the right, increasing Price and decreasing interest rate.

But for the liquidity preference framework, it says that an increase in income leads to an increase in wealth thus shifting the demand curve for money to the right and increasing interest rate.

How can wealth increase decrease the interest rate in the bonds graph but increase it in the quantity of money supply graph. I'm sure I'm missing out on something obvious.

Answer 1

These are theories, so need empirical justification. They may not be true, and even if they appear to be true they may still be wrong about the cause and effect.

If you regard your first statement as saying that people with increased monetary wealth will want to see a income increase from this wealth then they will buy bonds and other less liquid investments pushing interest rates down, and your second statement as saying that people with increased non-monetary wealth will want to see an increase in liquid assets such as money so they can spend some of their wealth then they will sell bonds and other less liquid investments pushing interest rates up, you will find there is no intrinsic contradiction. Instead you get an explanation of the existence of secondary markets in bonds and other investments to reconcile the needs and desires of different people