Chapter 32: Problem 14

Which of the following is false? (LO3) a) The gold standard will work only when the gold supply increases as quickly as the world's need for money. b) The gold standard will work only if all nations agree to devaluate their currencies simultaneously. c) The gold standard will work only if participating nations are willing to accept periodic inflation. d) The gold standard will work only if participating nations are willing to accept periodic unemployment.

Short Answer

Expert verified

The false statement is b) "The gold standard will work only if all nations agree to devaluate their currencies simultaneously."

Step by step solution

Understanding the Gold Standard

The gold standard refers to a monetary system where a country's currency is directly linked to a fixed amount of gold. Under this system, countries maintain a fixed exchange rate between their currencies and gold, and international trade imbalances are settled using gold payments. The gold standard is characterized by fixed exchange rates, limited money supply, and periodic inflation and unemployment due to adjustments in the balance of payments.

Evaluating Statement a)

"The gold standard will work only when the gold supply increases as quickly as the world's need for money." Under the gold standard, an increase in the gold supply leads to an increase in the money supply. So, the gold standard can function more effectively when the gold supply grows at a rate that meets the expanding economy's needs. This statement is true.

Evaluating Statement b)

"The gold standard will work only if all nations agree to devaluate their currencies simultaneously." Under the gold standard, countries maintain fixed exchange rates between their currencies and gold, limiting the need for competitive devaluations. The gold standard is designed to ensure stability in exchange rates and eliminate the need for simultaneous devaluation. This statement is false.

Evaluating Statement c)

"The gold standard will work only if participating nations are willing to accept periodic inflation." In the gold standard, countries with trade surpluses receive gold, which increases their money supply and can lead to inflation. Conversely, nations with trade deficits see a reduction in their money supply, causing deflation. As part of the adjustment mechanism, participating nations need to accept periodic inflation and deflation. This statement is true.

Evaluating Statement d)

"The gold standard will work only if participating nations are willing to accept periodic unemployment." Under the gold standard, countries with trade deficits experience reduced money supply and economic contraction, which can lead to higher unemployment. To restore the balance of payments, these countries need to accept these adjustments, including periodic unemployment. This statement is true. Conclusion: The false statement is b) "The gold standard will work only if all nations agree to devaluate their currencies simultaneously."

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