CH 4 Appendix 2 and 3

Appendix 2: Supply and Demand in Gold Market
Deriving Demand Curve
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Appendix 2: Supply and Demand in Gold Market
Deriving Demand Curve
Return= (Pet+1 - Pt)/ Pt
Image: Appendix 2: Supply and Demand in Gold Market Deriving Demand Curve
Supply and Demand in Gold Market
Deriving Supply Curve
-Pt ↑, more production, Gs ↑
- Supply curve is upward sloping (very steep)
Supply and Demand in Gold Market
-Market Equilibrium
P* = equilibrium price
-shift due to some other factor than today's gold price
Image: Supply and Demand in Gold Market -Market Equilibrium
Changes in Equilibrium
Factors That Shift Demand Curve for Gold
1. Wealth
-wealth goes up, Qd goes up, DC shifts right
2. Expected return on gold relative to alternative assets
-gold is more desirable and Qd increase, DC shift right
3. Riskiness of gold relative to alternative assets
-riskiness declines (less volatile), gold is more desirable and Qd increase, DC shift right
4. Liquidity of gold relative to alternative assets
-more liquid, gold is more desirable and Qd increase, DC shift right
Changes in Equilibrium
Factors That Shift Supply Curve for Gold
1. Technology of mining
2. Government sales of gold
-Qs increase and SC shifts right
Case: Change in Price of Gold From a Rise in Expected Inflation
As seen on the next figure, if expected inflation increases,
-pie= expected inflation
Image: Case: Change in Price of Gold From a Rise in Expected Inflation As seen on the next figure, if expected inflation increases, -pie= expected inflation
Figure 1 A Change in the Equilibrium Price of Gold
Image: Figure 1 A Change in the Equilibrium Price of Gold
Start of Appendix 3
Figure 4.1 Supply and Demand for Bonds (from earlier in the chapter)
Image: Start of Appendix 3 Figure 4.1 Supply and Demand for Bonds (from earlier in the chapter)
Supply/Demand for figure 4.1
-Problem with this framework: interest rates are indirectly determined from equilibrium bond prices.
-Want a framework where rates are the point - on the x-axis.
Figure 1 A Comparison of Terminology: Loanable Funds and Supply and Demand for Bonds
Image: Figure 1 A Comparison of Terminology: Loanable Funds and Supply and Demand for Bonds
Supply/Demand Figure 1AA bit odd - demand and supply are sloping the wrong direction. - Just rename axes! -- X-axis: Quantity of Bonds or Loanable Funds -- Y-axis: Interest rate - Two methods are equivalent, both locking at demand/supply in terms of stocks (amounts).