Explain how a gold standard system would automatically correct an imbalance in the balance of payments.

Question

Quizplus · Accepted Answer

The Answer is The gold standard was a system that automatically managed a country's money supply. If a country had a balance of payments deficit at the current fixed exchange rate, gold would flow out of the country. This outflow of gold would cause the money supply to automatically decline and the change in the money supply would set in motion forces that would tend to briskly correct the balance of payments deficit. The reverse would occur when a country had a balance of payments surplus.

Explain How a Gold Standard System Would Automatically Correct an Imbalance