Consider a country that was debating whether to adopt the gold standard during t

Question

Consider a country that was debating whether to adopt the gold standard during the heyday of that international monetary arrangement. What difference would the level at which the price of gold was set by the central bank make for the level of economic activity in the country? Explain. Consider a country that was debating whether to adopt the gold standard during the heyday of that international monetary arrangement. What difference would the level at which the price of gold was set by the central bank make for the level of economic activity in the country? Explain.

Explanation / Answer

Gold standard provided stability to currency and price level in an economy. In this way it spurs the economic activities. Domestic currency is fixed to gold, but if the gold is discovered more then it would have nefarious impacts on the economy. It happened to US economy in 1850 when discovery of gold led to increase in money supply, nominal income and income in economy. Further, it led to the fall in export and country's growth suffered. It also would not work properly if implemented during heydays since other countries shunned it and decided exchange based on their own convenience. This may lead to flow of gold.

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