The following question, which has several parts, deals with various aspects of a gold standard monetary...

The following question, which has several parts, deals with various aspects of a gold standard monetary system.

b. What are the economic consequences of adopting a gold standard on the long-run average rate of inflation?

Solutions

Expert Solution

GOLD STANDARD: It is a replacement of paper money or fiat money with gold.

How it works?

Countries decides to link the paper currency with Gold. This is then used to buy and sell by the government. It has a fixed rate of exchange.

Consequences of gold standards:

1). It reduces the power of government or banks of issuing more currency for price inflation. The paper currency increases the chances of inflation because prices can increase rapidly.

Gold standard brings stability in economy as the Gold standard remains fixed and bring no price hike. In long term also price hike can control by gold standard. Since it brings stability in economy the chances of growth would reduce. A little inflation is always beneficial.

2). It reduces the burden of government of minting the coins and currencies. It also reduces the ability to print the currency and increase the money supply in economy.

3). It would also help in controlling deflation.

Rahul Sunny answered 1 year ago

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