Question

Define the following pairs of terms and explain the similarity, difference or relationship between the terms:

• Expenditure changing and switching policies

• Gold standard and gold exchange standard

Answer 1

Expenditure changing policy influence income and employment for equating domestic expenditure or absorption and production and assumes the form of fiscal or monetary policy. Expenditure switching refers to a macroeconomic policy that impacts the constitution of a country’s expenditure on international and national goods. It is a policy to balance a country’s current account by modifying the constitution of expenditures on foreign and domestic goods.

Expenditure changing and switching policies play a key part in the accomplishment of macroeconomic stability or internal and external balance. Internal balance refers to the economy when there is the existence of complete employment of a country’s resources and stability in domestic price levels. External balance exists in an economy when neither excessive current account deficit nor surplus exists (or net exports are equal or close to zero).

According to the gold standard almost every country fixed the value of their currencies in terms of a definite quantity of gold, or linked their currency to that of a country which did the same. The national currencies were freely convertible into gold at the fixed price with zero restriction on gold import or export. The gold coins circulated like national currency along with metallic coins and the composition differed in terms of countries. Each currency and exchange rate between the participating currencies was fixed in terms of gold.The central banks had to maintain convertibility of fiat currency into gold at the fixed price and defend the exchange rate. The banks also had to fast-rack the adjustment process leading to an imbalanced balance of payments.

A gold exchange standard is the mixture of reserve currency standard and a gold standard. Here a reserve currency is chosen and every non-reserve countries fixes their exchange rates to the reserve at a pre-determined rate. The non-reserve countries hold a stock of reserve currency assets to carry out the procedure. The reserve currency country fixes its currency value to a weight in gold and agrees to exchange gold for its own currency with other central banks within the system based on demand.

The difference between gold exchange standard and gold standard is that the reserve country only exchanges gold for currency with the central banks.

If the non-reserve countries collect enough reserve currency for gold exchange from the reserve country central bank then it will lead to outflow of gold reserves from the reserve currency country.