homework5answersspring2008 - Economics 102 Spring 2008...

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Economics 102 Spring 2008 Answers to Homework #5 Due in class on 5/5/08 On your homework please include at the top of the first page your name, TA name, and the section number for the discussion section you attend. All homeworks should be legible and neat: do a professional looking job! (1) History tells us that the Spanish Conquistadors conquered the New World and its rich sources of precious metals. The conquistadors pillaged various natives and later operated local mines to extract silver and gold. From 1600 – 1650 there were about 268 tons of precious metals exported to Western Europe annually. After importing the metals, the metals were further exported to other countries. The following chart demonstrates a possible trade route of silver flows across the world for two different time periods. Source: Vries, J. de 2003. In: Global connections and monetary history 1497-1795 a) Assuming that the velocity of money was constant over the period and that output did not change, use the equation M V = P Y, or the (Quantity of Money * Money Velocity = Aggregate Price level * Output), to explain what was occurring in Europe’s economy during this time period. Answer: the importation of massive quantities of silver and gold is an exogenous shock greatly affecting the price levels in Europe. The relative price of silver fell, thereby raising the general price level. Using the equation M V = P Y, we can see that if V and Y are constant while M (the money supply) increases, this will result in a proportionate increase in P, the aggregate price level. This same effect would continue throughout Europe as cross border trade in goods would transfer the precious metals throughout Western Europe. silver flows 1600 - 1650 Silver flows 1725 - 1750
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Because prices are higher, it requires more cash-money to pay for goods. Thus the rise in the aggregate price level shifts the demand for money to the right. b) During the 1725 – 1750 time period, assume there is a population boom in China, thereby greatly increasing output. Knowing that the Quantity of Money supplied = k * PY in equilibrium, what is one possible reason China was importing so much silver? In your
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homework5answersspring2008 - Economics 102 Spring 2008...

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