Question
Historians call the wave of inflation that swept Europe during the 16th and 17th centuries the Price Revolution. It is seen as revolutionary in character
Historians call the wave of inflation that swept Europe during the 16th and 17th centuries the Price Revolution. It is seen as revolutionary in character partly because it followed a long period of stable prices, and partly because the prevailing view at the time was that prices and wages should be matters of fairness and justice rather than functions of supply and demand. The inflation struck Spain the hardest, quadrupling prices within a century. Economists have mostly ascribed the influx of gold and silver from the New World as the cause of inflation.[1]
- Use a standard IS-LM, AD-AS-LRAS model to explain how the influx of gold and silver from the New World may have ended up causing inflation in Europe.[2] Make sure to clearly explain each curve shift and link movements in the key variables.
- According to the same model, could there have been any impact of this influx of metals on European output or real GDP growth? Make sure to explain your answer using the Classic view on neutrality and the Keynesian view on neutrality (guideline: about 5 sentences and one graph, perhaps the same as used above, should be enough for a good answer).
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