Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered, as is what happened in the United States in 1849. If the economy is at full employment, what should this discovery do?

Question

Quizplus · Accepted Answer

In a gold standard system, the money supply is directly linked to the amount of gold reserves held by the government. Therefore, the discovery of vast amounts of gold would increase the money supply. If the economy is at full employment, this increase in the money supply would lead to an increase in demand for goods and services, causing inflation.

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