Under a gold standard, a balance of payments disequilibrium would be corrected automatically by

Question

Quizplus · Accepted Answer

Under a gold standard, a balance of payments disequilibrium would be corrected automatically by an outflow or inflow of gold. If a country has a deficit in its balance of payments (i.e. it imports more than it exports), it will lose gold reserves as other countries demand payment in gold. This will cause a contraction in the money supply, leading to a lower level of prices and a depreciation of the currency, making exports cheaper and imports more expensive. Conversely, if a country has a surplus in its balance of payments (i.e. it exports more than it imports), it will gain gold reserves as it receives payments in gold. This will cause an expansion in the money supply, leading to a higher level of prices and an appreciation of the currency, making imports cheaper and exports more expensive.

Under a Gold Standard, a Balance of Payments Disequilibrium Would