PS1 - Spring Term 2008. EC 330. Money Banking and Financial...

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Spring Term 2008. EC 330. Money Banking and Financial Markets. Problem Set 1. Please answer all the questions below. 1) Describe the neoclassical and the Keynesian theory of firm fixed investment. Identify the possible analogies between the two theories, with a particular emphasis on the predictions on the effects of changes in interest rates on investment. (3 Points) 2) Discuss in detail the four roles of money, providing some examples. (3 Points) 3) Part a) Outline the historical evolution in the physical nature of money. Stress the drawbacks of commodity money and, hence, the reasons that led to replace commodity money with fiat money. (3 Points) Part b) Read and summarize the pages drawn from the Cambridge Economic History of Europe attached to this page. (6 Points) 4) Describe the way the quantity of money in circulation in the economy is measured. Outline the advantages and drawbacks of using the Divisia Index. (3 Points)
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CHAPTER V Monetary, Credit and B&g Systems I. Money and Credit in the Local Economy (I) REAL COINAGE AND MONEYS OF ACCOUNT WITH the expansion of the towns in the later Middle Ages, and in response to the needs of their trades and industries, the money economy had everywhere become more pervasive. An essential feature of urban growth, it had also penetrated vigorously the economy of the country- side, disturbing age-old customary routines as it did so. Pure barter did not disappear immediately fiom the local economy even in the six- teenth and seventeenth centuries. The use of credit facilities in the money sector even enhanced the opportunities for barter transactions in so far as it encouraged barter on an extended time basis.' Yet every- where money was on the march. Rural production, both agricultural and industrial, was increasingly commercialized. Urban industry stimulated internal and external demand through specialization. The expansion of transcontinental and, above all, the Atlantic traffic opened up unprecedented prospects for intra-European distribution of goods. The market, designed to bring supply and demand together more efficiently, catalysed the new impulses of the sixteenth, seventeenth and eighteenth centees. Urban and rural markets, weekly markets and fairs, multiplied in Europe or intensified their activity, assisting the penetration of the local economy by money ahd credit in many forms. First came metallic money. On the local markets most transactions, apart fiom pure barter, were already valued in money and settled in cash. The increasing use of metallic money in the local economy nevertheless posed serious problems. Usually a real coin with its multiples or divisions would form the basis of the current money of acc~unt.~ The smaller the real divisions, the less was their relative silver content: this content was necessarily less than proportional, because the cost of minting the coins increased more than in proportion. Apart fiom these deviations, and apart fiom the seignorage, the circulation
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PS1 - Spring Term 2008. EC 330. Money Banking and Financial...

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