Question

1. Which of the following does not correctly describe the gold standard?

1. The gold standard leads to long run price stability.
2. The gold standard puts undesirable constraint on the use of monetary policy to fight unemployment.
3. The gold standard reduces international transaction costs.
4. The gold standard creates no speculation.

explain pls

Answer 1

The correct answer is Option (D) The gold standard creates no speculation

Explanation -

Speculation in asset classes creates bubbles. Just as an example, the 2008-09 housing crisis was due to speculation in the housing market. Similarly, the stock market bubble in the year 2000 was due to excessive speculation in the technology, media and telecommunication sector. While these speculation happened under the fiat money system, there have been ample instances of speculation under the gold standard. Just as an example, the speculation and asset bubble in the 1920s was under the gold standard. It is important to note that speculation across asset classes is due to irrational exuberance. Even with limited money supply, the liquidity can flow to one or few asset classes and create speculative activity within those asset classes. While higher money supply certainly supports speculation, relatively tight money supply under gold standard does not eliminate speculation.