Question

Suppose a country uses silver as money. When is it more likely that people would seek out new deposits of silver to mine: during periods of inflation or periods of deflation? Explain.

Answer 1

Inflation indicates rise in price level. When price level rises, purchasing power of money declines.

This decline in purchasing power of money compels people to seek more money so as to maintain same level of consumption as was in previous time period.

On the other hand, deflation indicates fall in price level. When price llevel falls, purchasing power of money rises.

This rise in purchasing power of money make people to seek less money as lesser amount of money is now sufficient to maintain the same level of consumption as was in previous time period.

So, if silver is used as money then it is more likely that people would seek out new deposits of silver to mine during periods of inflation as during the periods of inflation they will need more money to maintain same living standard as was before.