Gold standard NCLEX Review Questions

Gold standard NCLEX Review Questions Gold standard? - ANS A monetary standard under which the basic unit of currency is equal in value to and exchangeable for a specified amount of gold. Minimal gold standard? - ANS The minimal gold standard would be a long-term commitment to tighten monetary policy enough to prevent the price of gold from permanently rising above parity Full gold standand? - ANS A full gold standard would be a commitment to sell unlimited amounts of gold at parity and maintain a reserve of gold sufficient to redeem the entire monetary base. monetary policy? - ANS Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability What is the official goals of monetary policies? - ANS The official goals usually include relatively stable prices and low unemployment. When was the gold standard utilized as a monetary policy? - ANS The gold standard was widely used across the world between the mid-19th century through 1971 What was some advantages of using the gold standard? - ANS 1. Its major advantage is simplicity and transparency. 2. The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. 3. The gold standard makes chronic deficit spending by governments more difficult, as it prevents governments from inflating away the real value of their debts. A central bank could not create unlimited quantities of money at will, as there is a limited supply of gold. When and why was the gold standard abandoned? - ANS The gold standard was abandoned during the Great Depression, as countries sought to reinvigorate their economies by increasing their money supply. How does the monetary policy, the gold standard, influence an economy? - ANS The gold standard brings about deflation, as the economy usually grows faster than the supply of gold. How does this monetary policy induces deflation? - ANS When an economy grows faster than its money supply, the same amount of money is used to execute a larger number of transactions. The only way to make this possible is to lower the nominal cost of each transaction, which means that prices of goods and services fall, and each unit of money increases in value What seems to be a disadvantage of the gold standard monetary policy? - ANS 1. The total amount of gold that has ever been mined is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current application. What seems to be some other disadvantage of the gold standard monetary policy? - ANS 1. Deflation rewards savers and punishes debtors. Deflation also prevents a central bank of its ability to stimulate spending. 2. Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. 3. Monetary policy would essentially be determined by the rate of gold production. 4. Since the government could not have discretion over monetary policy, unemployment was higher during the gold standard years. 5. The cost of maintaining a full gold coin standard for the United States in 1960 to be more than 2.5 percent of GNP. How is inflation a factor in a gold standard economy? - ANS High levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the gold supply increases. Gold supply for monetary use is limited by the available gold that can be minted into coin. High levels of inflation under a gold standard are usually seen only when warfare destroys a large part of the economy, reducing the production of goods, or when a major new source of gold becomes available.