Exploring the Aggregate Supply and Demand

7. In the middle of the 14th century, the Black Death first visited Europe, and in following decades it revisited many times. The plague destroyed about one third of the population, but of course did not destroy land, capital, housing, or money.

a) What does the quantity theory of money predict about the changes to output and price level as a result of the plague? (Hint: Use the Aggregate Supply and Demand graph.)
b) What does the quantity theory predict about gold flows between areas affected and areas untouched?
c) (For those who understand the idea of a production function) Do you expect that output fell by more or less than the drop in population? Why?

8. "Inflation, spurred on by a booming economy, made things worse."

"Economic growth spurred on inflation, and in the mid 1980s cracks began to appear in the facade of modern industrial progress."

These two quotations are from a book about China published several years ago. They appear to imply that rapidly increasing production causes inflation. Is this cause-effect relationship predicted by the quantity theory of money? Explain in a couple of neatly written sentences.

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