Question

Discuss one benefit and one drawback of a gold based monetary system.

Answer 1

Usage of the gold standard has other benefits including price stability. This is a long-term gain which makes it more difficult for governments to inflate prices by expanding the money supply. Inflation is uncommon and hyperinflation does not occur because the money supply will only expand if gold supply rises. Similarly, the gold standard can have fixed international tariffs between participating countries, which can also minimize international trade uncertainty.

But it can trigger a gold standard imbalance among countries that participate. Gold-producing nations may have an advantage over those that don't produce the precious metal, thereby growing their own stocks. According to some economists, the gold standard can also prevent the prevention of economic recessions, because it impedes a government's ability to raise its money supply a resource other central banks need to help boost economic development.