Question

1. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo, Egypt, where he gave away a large amount of gold (true story). At the time, gold was used as a medium of exchange in Egypt.

a. (6 points) How would we would predict that this increase in the quantity of gold in Cairo would affect the value of gold in Cairo? Briefly explain your response in a sentence or two.

b. (6 points) How would we would predict that this increase in the quantity of gold in Cairo would affect the inflation rate in Cairo? Briefly explain your response in a sentence or two.

Answer 1

a) An increased supply of gold will shift the supply curve of the gold to the right and the new equilibrium will be at a lower price and higher quantity, After Musa dumping the gold in Cairo the value of the gold will fall drastically as the good is available in abundance in the market.

b) As the gold was used as a currency in the market an increased supply will lead to an increase in the demand as people have a lot of gold in hand. An increased demand for the good will lead to an hyper inflation in the market and gold will buy very less than it use to buy, eventually it will lose the value in the market an people will start barter to fulfill the demand.