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b) Furs and wampum were used as money in order to frontier trade with the indigenous
population. They were declared legal tender for sums up to one shilling in 1637.
“Cash crops” such as tobacco and rice were natural commodities and were used in
Virginia as money for about 200 years. Unofficial coinages were used as money when
it came to distant as well as local trade. Paper currencies were used in the later
a) The quantity theory for the classical model shows that an increase in the money
supply will lead to a proportionate increase in prices. Real GDP is fixed so price level
is the only thing that changes. The aggregate supply curve is vertical in the classical
model. An inc. in money supply leads to an increase in aggregate demand, which
increases the price level.
b) For the monetarist model, if velocity is stable then a stable rate of growth in real GDP
can be achieved through a stable rate of growth in the money supply. Inflation will
result if the money supply increases...
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