Transcript Chap 4web

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Appendix 2
Applying the Asset
Market Approach
to a Commodity
Market: The Case
of Gold
Supply and Demand in Gold Market
• Deriving Demand Curve
P  Pt
e
R 
g
Pt
e
e
t 1
– Pet+1 is held constant
– Pt , ge , Re   Gd 
– Demand curve is downward sloping
• Deriving Supply Curve
– Pt , more production, Gs 
– Supply curve is upward sloping
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Web Appendix B-2
Supply and Demand in Gold Market
• Market Equilibrium
1. Gd = Gs
2. If Pt > P* = P1, Gs > Gd, Pt  to P*
3. If Pt < P* = P1, Gs < Gd, Pt  to P*
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Web Appendix B-3
Changes in Equilibrium
• Factors That Shift Demand Curve for Gold
1. Wealth
2. Expected return on gold relative to alternative assets
3. Riskiness of gold relative to alternative assets
4. Liquidity of gold relative to alternative assets
• Factors That Shift Supply Curve for Gold
1. Technology of mining
2. Government sales of gold
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Response of Gold Market
to a Change in πe
• If πe 
1. πe , Pet+1 ; at given Pt,
ge   Gd   Gd shifts
right
2. Go to point 2; Pt 
3. Price of gold positively
related to πe
4. Gold price is barometer
of π- pressure
Figure 4.Web A1 A Change in the Equilibrium Price of Gold
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Web Appendix B-5