If the quantity equation holds, then a country operating under a gold standard will experience _______ when its residents discover large gold deposits underground.
A) deflation
B) disinflation
C) inflation
D) All of the above are correct.

Question

Quizplus · Accepted Answer

The quantity equation (M x V = P x Y) states that the money supply (M) multiplied by its velocity of circulation (V) equals the price level (P) multiplied by the level of real output (Y). Under a gold standard, the money supply is directly linked to the amount of gold reserves a country has. If residents discover large gold deposits underground, the country's gold reserves will increase and therefore its money supply will increase. With a constant velocity of circulation and level of real output, this increase in the money supply will lead to an increase in the price level, or inflation. Therefore, the correct answer is C - inflation.

If the Quantity Equation Holds, Then a Country Operating Under