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In: Economics

The determinants of asset demand apply to gold as well: wealth, expected return on gold relative...

The determinants of asset demand apply to gold as well: wealth, expected return on gold relative to alternative assets, riskiness of gold relative to alternative assets, and liquidity of gold relative to alternative assets. Show graphically and explain how changes in each factor shifts the demand for gold.

Expert Solution

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Question:

Answer:

Situation 1: Wealth

a). Wealth Increase:

When wealth increase Its increase demand for gold. Suppose the gold market is equilibrium at point "E" and increasing demand shift demand curve right from D0 to D1. Its increase the price level of gold.

b). Wealth Increase:

When wealth increase Its decrease demand for gold. Suppose the gold market is equilibrium at point "E" and decreasing demand shift demand curve left from D0 to D2. Its decrease the price level of gold.

Situation 2: Expected return on gold relative to alternative assets

a). Expected return on gold relative to alternative assets increase:

Increasing expected return on gold relative to alternative assets increase demand for gold. Suppose the gold market is equilibrium at point "E" and increasing demand shift demand curve right from D0 to D1. Its increase the price level of gold.

b). Expected return on gold relative to alternative assets decrease:

Decreasing expected return on gold relative to alternative assets decrease demand for gold. Suppose the gold market is equilibrium at point "E" and decreasing demand shift demand curve left from D0 to D2. Its decrease the price level of gold.

Situation 3: Riskiness of gold relative to alternative assets

a). Riskiness of gold relative to alternative assets Increase

Increasing riskiness of gold relative to alternative assets decrease demand for gold. Suppose the gold market is equilibrium at point "E" and decreasing demand shift demand curve left from D0 to D2. Its decrease the price level of gold.

b). Riskiness of gold relative to alternative assets decrease:

Decreasing riskiness of gold relative to alternative assets increase demand for gold. Suppose the gold market is equilibrium at point "E" and increasing demand shift demand curve right from D0 to D1. Its increase the price level of gold.

Situation 4: Liquidity of gold relative to alternative assets.

a). Liquidity of gold relative to alternative assets increase::

Increasing liquidity of gold relative to alternative assets increase demand for gold. Suppose the gold market is equilibrium at point "E" and increasing demand shift demand curve right from D0 to D1. Its increase the price level of gold.

b). Liquidity of gold relative to alternative assets decrease:

Decreasing liquidity of gold relative to alternative assets decrease demand for gold. Suppose the gold market is equilibrium at point "E" and decreasing demand shift demand curve left from D0 to D2. Its decrease the price level of gold.

Graph:

Thank You

Rahul Sunny answered 1 year ago

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