How did the gold standard help countries rectify the balance of payment problem? What were the problems associated with the gold standard?
Under gold standard all currencies were defined in terms of gold. When a nation ran a balance of payments deficit, it had to sell gold to finance the deficit. Because the domestic money supply was based on gold, losing gold to foreigners meant that the money supply fell automatically, thus raising interest rates. Those higher interest rates attracted foreign capital. At the same time, this restrictive "monetary policy" pulled down output and prices, which discouraged imports and encouraged exports. The balance of payments problem quickly rectified itself.
Under the gold standard no nation had control of its domestic monetary policy. An analogous problem is that under fixed exchange rates, monetary policy must be dedicated to pegging the exchange rate. It cannot, therefore, be used to manage aggregate demand. Another difficulty was that the world's commerce was at the mercy of gold discoveries.
You might also like to view...
What two variables are determined in an aggregate supply-aggregate demand figure? Is the slope of the short-run aggregate supply curve positive or negative? Is the slope of the aggregate demand curve positive or negative?
What will be an ideal response?
Suppose group price discrimination is possible; however, a firm sets the same price in each market. As a result,
A) price elasticity of demand is the same in each market. B) the price-inelastic market will buy zero units. C) marginal revenue in the more price-elastic market exceeds marginal revenue in the less price-elastic market. D) the deadweight loss is less than if the firm price discriminated.
In the short-run macro model, cyclical unemployment is caused by insufficient spending
a. True b. False
Which of the following could make Chinese-made goods more expensive for American consumers?
A. An increase in the value of the yuan B. An increase in the inflation rate in the United States C. A decrease in the size of the U.S. trade deficit D. An increase in the value of the dollar