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Chapter 19: Q.9 (page 528)

“Inflation is not possible under the gold standard.” Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The given statement "inflation is not possible under the gold standard" is false.

Step by step solution

01

Concept Introduction

Golden standard refers to the fixed rate of exchange system under which each countries' currency is created convertible into some fixed amount of gold that also fixed the rate between these currencies.

02

Explanation of Solution

The given statement "inflation is not possible under the gold standard" is false. The gold standard includes the measurement of the assorted currencies on the premise of the gold. And this measurement is fixed as per the supply of gold during a country. The discoveries or increase in gold in a very country would increase the cash supply of that country which might mean decrease within the value of the currency. The decrease within the value of the currency thanks to the rise in gold or finances would end in inflation within the country. So, inflation is feasible under the gold standard. Thus, given statement isn't true.

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Most popular questions from this chapter

Under the gold standard, if Britain became more productive relative to the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a fixed exchange rate between the United States and Britain?

For each of the following, identify in which part of the balance-of-payments account the transaction is recorded (current account, capital account, or net change in international reserves) and whether it is a receipt or a payment.

a. A British subject’s purchase of a share of Johnson & Johnson stock

b. An American citizen’s purchase of an airline ticket from Air France

c. The Swiss government’s purchase of U.S. Treasury bills

d. A Japanese citizen’s purchase of California oranges

e. $50 million of foreign aid to Honduras

f. A loan from an American bank to Mexico

g. An American bank’s borrowing of euro dollars

Suppose that you travel to Cali (Colombia), where the exchange rate is1USDto2,900Colombian pesos. As you enter a McDonald’s restaurant, you realize you need 17,400Colombian pesos to buy a Big Mac. Assuming a Big Mac sells for $5in the United States, would you say that the Colombian peso is over- or undervalued in terms of PPP?

If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime, what kind of intervention would that country’s central bank be forced to undertake, and what effect would the intervention have on the country’s international reserves and money supply?

“The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more independent monetary policies.” Is this statement true, false, or uncertain? Explain your answer.
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