A gold standard automatically implements pro-cyclical monetary policy, ceteris paribus.

Question

Quizplus · Accepted Answer

Under a gold standard, the money supply is tied to the supply of gold, which tends to be pro-cyclical. As the economy expands, the demand for credit and thus the demand for money increases, leading to an increase in the price of gold and a corresponding increase in the money supply. This can exacerbate economic booms and create inflationary pressures. Conversely, during a downturn, the demand for credit and money decreases, leading to a contraction of the money supply, which can deepen the recession. Thus, a gold standard tends to implement a pro-cyclical monetary policy, all else being equal.

A Gold Standard Automatically Implements Pro-Cyclical Monetary Policy, Ceteris Paribus