Contango and backwardation
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1 Aggregate Demand
4. Explain the intuition behind the wealth, interest rate, and exchange rate effects.
The intuition behind the real wealth effect is that when the price level decreases, it takes less
money to buy goods and services. The money you have is now worth more and you feel
wealthier. So, in response to a decrease in the price level, real GDP will increase. More
formally, this means that when households’ assets are worth more in terms of their
purchasing power, they are more likely to purchase more goods and services.
The opposite happens when the price level increases. If the price of everything increases, but
the number of dollars you have doesn’t, then you have to cut back on spending. Some
shorthand of this chain of events can help us wrap our heads around this:
PL↓→real wealth ↑→consumption increases→move right along AD curve
The intuition behind the interest rate effect is that when the price level decreases, you need
less money in your pocket to buy stuff. The less money you need to keep on hand to buy
stuff, the more money you are going to keep in a bank. Banks pay interest to try to lure
people to deposit their money in banks. So, if you are going to keep more money in the bank
anyway, banks don’t have to offer as much interest in order to convince you; that drives
interest rates down. As a result, businesses and households spend more money on investment
and “big ticket” items that are interest sensitive, like X, Y, and Z. So, once again, a decrease
in the price level will increase real GDP.
On the other hand, a higher price level will drive up interest rates. Remember how a higher
price level would make everyone’s dollars are worth less, and they cut back on consumption?
Well, what if they didn’t want to cut back on consumption. Instead, maybe they sell off some
other asset like a bond to try to get more money. The problem is, every other bondholder is
also trying to sell off their bonds, so there are no buyers! Anyone who wants to issue a new
bond is going to have to do something to try to attract buyers. The way to do that is to raise
the interest rate that is offered. All of that excess demand for money leads to an increase in
the interest rate.
Finally, the intuition behind the exchange rate effect is that a decrease in the price level in
country A makes its goods cheaper to country B, so country B buys more of country A’s
exports. When the price level in one country goes down, its goods are suddenly more
attractive to every other country. It’s like the whole country is on sale! Since that country’s
goods are suddenly cheaper, their exports go up.
2 Multipliers
4. Households in Iron Island save 10% of every additional dollar in income that they
receive. What will happen to aggregate demand Maggietopia if there is a $4 billion
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Note: Please answer this question on your own.
3 Short-run Aggregate Supply (SRAS)
.
Demand Analysis
1. Demand refers to how much of a good or service is desired by buyers at various prices and is determined by factors like price, income, tastes, and expectations of buyers.
2. The relationship between price and quantity demanded is known as the demand curve, which slopes downward as quantity demanded decreases when price increases.
3. A shift in the demand curve occurs when a change in a determinant of demand causes a different quantity to be demanded at each price, while movement along the curve refers to changes in quantity demanded due to price changes with other factors held constant.
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1) Demand refers to how much of a good or service is desired by buyers at various prices. It is represented by a demand curve showing the relationship between price and quantity demanded.
2) Demand is determined by factors such as price, income, tastes, prices of substitutes and complements, and expectations about future prices and income.
3) The law of demand states that, all else equal, quantity demanded is inversely related to price - as price increases, quantity demanded decreases, and vice versa.
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Demand refers to how much of a good or service consumers are willing and able to purchase at a given price. It depends on consumers' desire and ability to pay, as well as the good being available at a certain price, place, and time. Demand is determined by factors like price, income, prices of related goods, tastes, expectations, and the number of buyers. The relationship between price and quantity demanded is shown through a demand schedule and demand curve, which has a negative slope as per the law of demand. A change in any determinant can cause the demand curve to shift, changing the overall relationship between price and quantity demanded.
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Pricing strategy
How do businesses price various products? What influences such prices? What is a uniform method of determining a product's price?
Derivatives of Capital marketsCcm derivatives videoshoot
What are Derivatives?
Features of Derivatives
Importance and Role of Derivatives in Financial Market
Speculators and Hedgers
Cms file 432053
The document provides an overview of supply and demand concepts including:
- Demand is influenced by price, income, tastes, and availability of substitutes and is shown as a downward sloping curve. Supply is influenced by price of inputs, technology and number of sellers and shown as an upward sloping curve.
- Equilibrium occurs when quantity demanded equals quantity supplied and price balances the plans of buyers and sellers. Changes in demand or supply factors shift the curves and change the equilibrium price and quantity.
Cms file 432053
The document provides an overview of supply and demand concepts including:
- Demand is influenced by price, income, tastes, and availability of substitutes and is shown as a downward sloping curve. Supply is influenced by price and costs and shown as an upward sloping curve.
- Equilibrium occurs where quantity demanded equals quantity supplied at the market clearing price.
- If demand increases, price rises as quantity supplied cannot keep up with increased demand. If supply increases, price falls as quantity demanded cannot absorb the increased supply.
Law of Supply and Demand
The document discusses supply and demand theory. It explains that supply and demand curves slope upward and downward respectively, showing that quantity supplied increases with price while quantity demanded decreases with price. A change in price results in movement along the existing curves, while other factors like income, tastes, technology, and costs can cause the curves to shift left or right. The interaction of supply and demand determines market equilibrium price and quantity.
THEORY OF DEMAND
This document discusses the theory of demand. It defines demand and outlines the law of demand, which states that as price increases, quantity demanded decreases, assuming other factors remain constant. It discusses individual and market demand schedules and curves. It also outlines several factors that influence demand, such as price, income, tastes, and the prices of substitutes and complements. Additionally, it discusses the concepts of change in quantity demanded versus change in demand, and explains the downward sloping nature of the demand curve. Finally, it covers price elasticity of demand, the factors that influence it, and its importance for pricing and revenue decisions.
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investment banking,capital market,Finance questions for interviews
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Contango and backwardation
- 1. Tired by searching meaning of contango and backwardation over the internet?
- 2. Confused in understanding concept of contango and backwardation by referring innumerable websites over the web? But the question still remains, How to understand contango and backwardation in simple language
- 3. Don’t worry! This presentation gives you a gist of contango and backwardation
- 5. In certain energy and commodity markets contango and backwardation terms are used. If we get more into deep into it; we can say that especially in the crude oil market these terms are used. In many books you can see only theoretical definitions but in practical that concept is much different. There are two concepts of contengo• • Contengo Normal Contengo
- 6. Contango refers to the situation where the Future prices of stock are higher than the current spot price.
- 7. It refers to phenomena where Future price is higher than expected Future spot price (Expected market Price) in the market.
- 8. If you understand contengo by heart then you can easily predict the meaning of backwardation. Simply it is opposite to contengo. Backwardation can occur if the markets have oversupply of commodities. Backwardation is bearish indicator it also indicate an immediate shortage. There are two concepts of backwardation • • Backwardation Normal Backwardation
- 9. Backwardation Definition It refers to the market situation where the Future prices are lower than the current spot prices for a particular commodity.
- 10. Normal Backwardation It refers to phenomena where Future price is less than expected future spot price (Expected market Price) in the market.
- 11. Difference between Contango and Backwardation Basis Definition Contango Contango refers to the situation where the Future prices of stock are higher than the current spot price Future Curve Price Difference Most Happen in Case of Upward Sloping Future Price > Spot Price Commodity Backwardation It refers to the market situation where the Future prices are lower than the current spot prices for a particular commodity. Downward Sloping Future Price < Spot Price Oil
- 12. I hope you enjoyed this article. This article will guide you in understanding of contango and backwardation better. When you have liked this article then just come back here, and leave a comment, this will help us to publish better articles for you.