Question

In the context of your S-D gold model explain the impact of the following changes in economic conditions on the supply and/or demand for gold (ceteribus paribus). How is the equilibrium price and quantity affected? Show your results in a supply-demand graph of the U. S. housing market.

a) economic growth declines which decreases household disposable income.

b) the Federal Reserve lowers interest rates.

c) consumers anticipate accelerating inflation due to huge Federal budget deficits.

d) COVID increases risk and uncertainty of investing in stocks and other financial markets.

e) the cost of mining gold increases.

Answer 1

The demand for gold will increase with rise in income of the consumer and fall in price of gold. Gold is considered as a luxury good and this good having high demand among the high income group people. If the household income rises with imposing tax and reduction in the economic growth, this will decrease the demand for gold. This will shift the demand curve to left. Price S PO P1 D' D Y1 YO Quantity Fall in disposable income shift demand curve of gold leftward and this reduces the demand for gold. This reduces the price level. b) If there is reduction in interest rate, the investment rate increases and it gradually attain the economic development. This will increase the production of producers. This will shift the supply curve to rightward. This will reduce the price f gold and the level of quantity supplied. S Price level S PO P1 D YO Y1 Quantity

c) If there is high expectation about the inflation in gold. So people will try to demand more gold and make it safe to avoid the inflation problem. This will increase raise the price of gold and increase the quantity demanded the market. Price level S P1 PO D YO Y1 Quantity d) There is a high level of risk generated due to COVID 19 and also there is uncertainty in the investment in stock market and other financial institutions. People will hold their given level of assets in hand. In lockdown period, the demand and supply of gold will reduce. This will remain the quantity unchanged and the level of price for gold reduced. Price level S' S PO P1 D D' Quantity

e) If the cost of production increased, the supply will fall down. This fall in supply will increase the price level and this will reduce the quantity also. This higher cost of mining also affect the producers, they will leave from the market. S S Price level P1 PO D Y1 YO Quantity