Reference no: EM13930331

When we last saw Westeros, its private mint had produceda large number of seven-starsilver coins, called stags, at an actual mint equivalent of 32star per ounce, so that each star represented 1/32 ounces of silver and each stag contained 7/32 ounces. The minthad been defrauding the public, which had initially believed that the mint equivalent was 24stars per ounce. If that had been the case theneach star would have represented1/24 ounce of silver, and each stag would have contained 7/24 ounces of silver. Those latter figures were accurate for the coins the mint produced before it started defrauding the public.

After the debasement was discovered, the price of bread in (debased)starsrose from its initial level of 3½stars per loaf to stars per loaf. Before the debasement, three stags could buysixloaves of bread, because three undebasedstags contained 7/8 ounces of silver. [Although it took a full ounce of raw silver to buy six loaves of bread, the price of bread in monetary silver was 12.5 percent (1/8th) lower, because of the superior convenience of money in exchange.] After the debasement was discovered, it continued to take 7/8 ounces of monetary silver (silver contained in coins) to buy six loaves of bread. But that quantity of silver was now contained in four debased stags (28 debased stars).

The public in Westeros was outraged when it discovered the debasement, and the government responded by taking over the country's coinage system. It announced that it would begin minting additional stag coins at a mint price of 28 stars per ounce and a mint equivalent of 32stars per ounce. These coins would be legal tender for debts expressed in stars. But,at least for the moment, the coins previously produced by the private mint would also be legal tender.

In the course of the next three years, the government minted4 million stags. The private mint had also minted 4 million stags before it was closed down: 2 million before it began debasing its coins, and 2 million after.

1. How did the silver contents of the government-minted stags compare to the silver contents of the privately minted stags?

2. Do you think anyone would have used original (undebased) privately minted stags to make legal tender payments? Why, or why not?

In Westeros, bread was the only final good. Total annual production of bread was 72 million loaves. The final-goods velocity of money, in Westeros, was 8: the average coin was used to purchase bread eight times per year. The base year for real GDP for Westeros was the year before the private mint started debasing its coins.

3.

A. What was nominal GDP in Triskelion, in the base year? What was real GDP in that year?

B. Answer the same questions for any of the first three years after the government took over the coinage system.

Note: Remember that a country's nominal GDP for a year is the total market (current price) value, in the country's national monetary units, of the final goods produced in the country during the year. Its real GDP is the total value, in the country's national monetary units, of the final goods produced in the country during the year, using the prices from the base year.

4.

A. What was the value of the GDP deflator for Westeros, in the base year?

B. Answer the same questions for any of the first three years after the government took over the coinage system.

Notes: Remember that price level measures like the GDP deflator usually have decimal values fairly close to 1 in their normal forms, which are the forms we use in calculations: 0.87 or 1.75, for example. But they are usually reported in index form, which is to say, after being multiplied by 100. So if the normal-form value is 1.75, thenit is reported as 175.

When the GDP deflator (P) is used in the equation of exchange, we think of its value as being expressed in normal (non-index) form.

5. What was the level of money demand in Westeros, measured in government-mintedstars, afterthe government took over the coinage system?

Hint: Use the equation of exchange, and solve for M. Remember that , where Y represents nominal GDP.

6. Given your answer to Question 5, how many stags do you think were in circulation, after government mint had produced 4 million stags? What do you think happened to the original (undebased) privately minted stags?

Hint: Coins may go out of circulation because they are melted down or because they are saved. Under the assumptions of this assignment, coins will never be melted down, because their monetary value always exceeds the value of their silver contents. But they will be saved if the value of their silver contents is close to their monetary value, and if they are not needed to satify the country's demand for money.

Four years after the government of Westeros took over the coinage system, the country became involved in a war with the neighboring country of Dorne.Faced with the need to raisea large amount of revenue in a shrt time, it decided to turn to seigniorage.

The government announced that it was increasing the mint price of silver to 35 stars per ounce, and the mint equivalent to 49 stars per ounce.

7. How many ounces of silver did a star represent, according to the new mint equivalent? How much silver did a newly minted stag contain?

8. If the price of bread in stars did not change, how much purchasing power would a person have gained by bringing seven ounces of raw silver to the mint?

People responded to the increase in the mint price by bringing 650,000ounces of silver to the mint.(At that point, the mint set the mint price back to 28 stars, and no more silver was brought in.)

9. How many stars did this silver represent? How many stagswere minted?

10.

A. How much revenue, in stars,did the governmentearn from this operation? How much was it able to use for the war effort, assuming that the minting costs remained equal to 12.5 percent of the stars minted?

B. How much bread was the government able to buy with its net revenue, if prices remained unchanged?

11.

A. What was the debasement rate, for new stags? That is, by what percentage did the silver contents of a government-minted stag decrease, as a result of the increase in the mint equivalent?

B. Continuing to assume that prices (in stars) did not change, by what percentage did the purchasing power of a new stag, as money, exceed the purchasing power of the silver it contained? What about an old (government-minted) stag?

12. According to the quantity theory of money, what effect must the government's new mint have had on the money supply in Westeros,in order for theprice of bread to stay constant? For this to be possible, what must have happened to some of the coins currently in circulation? Which coins? Why?

Hint: See Question 6.

13. Based on your answer to question 11, what was the size of the new money supply, in stars? In stags? How was it divided among coins with different contents?

The following year, the war heated up again. The mint restored the mint price to 35, keepingthe mint equivalent at 49. This time, however, only 340,000 ounces of silver were brought to the mint.

14. How many starsdid this silver represent? How many stags were minted?

15. A. How many stars worth of coins were returned to the public? How many stags were returned?

B. How many stars did the government earn? How many of these did it lose because of minting costs? How many was it able to keep for the war effort?

16. Did the amount of money in circulation (the money supply) increase? If so, by what percentage? Explain carefully.

Hint: The money supply will increase if it is not always possible for old coins to be withdrawn from circulation when new coins are minted. See Question 12.

17. According to the quantity theory, did the price of bread, in stars, increase? If so, by what percentage, and what was the new price?

Hint: The price of bread will increase if the money supply increases.

18. Given the new price of bread, how much purchasing power would a person gain by bringing seven ounces of raw silver to the mint? How does this figure compare to your figure from Question 8?

Do you think this comparison may help explain why the quantity of silver brought to the mint was much smaller, this time? Explain briefly.

19. How much purchasing power, for the war effort, did the increase in prices cost the government?

20. Roughly how many additional stags would the government have had to mint (over and above the number you reported in Question 14) in order to drive the price of bread high enough so that the amount of silver in a stag was only 12.5 percent less than the amount of raw silver needed to buy the same amount of bread a stag would buy? (As we have seen, this was the normal situation for privately minted stags.)