Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered.If the economy is at full employment, what should this discovery do?

Question

Quizplus · Accepted Answer

In a gold standard system, the value of money is backed by gold reserves held by the central bank. If vast tracks of gold are discovered, the central bank can increase its gold reserves and thereby increase the money supply. This increase in the money supply, without a corresponding increase in output, would lead to an increase in the overall price level, causing inflation. Therefore, the correct answer is (B) "It should raise the money supply and cause inflation."

Suppose an Economy's Exchange Rate System Is the Gold Standard