The Classical Gold Standard: Practice Questions and Solutions

Problem 6. Which of these is one of the rules entailed in the classical gold standard?

(a) Nationalize the gold mines and extract gold at a fixed rate.
(b) Set a target rate for growing the money supply. If GDP grows at 3% per year, the central bank should grow the money supply at 3% per year.
(c) Fix an official gold price or "mint parity," and convert freely between domestic money and gold at that price.
(d) Require banks to hold 100% gold reserves.
(e) Prohibit all lending from the central bank to domestic banks.

Solution 6. The correct answer is (c): Fix an official gold price or "mint parity," and convert freely between domestic money and gold at that price.

Problem 7. Which of these is another of the rules entailed in the classical gold standard?

(a) Fix all wages and prices in terms of gold.
(b) Threaten to retaliate against any nations that deviate from the fixed exchange rate among national currencies.
(c) If it is impossible to convert between the national currency and gold as promised, slightly debase the coinage by adding a touch of silver to it.
(d) Allow the common price level (nominal anchor) to be endogenously determined by the worldwide demand for, and supply of, gold.
(e) Implement a free banking system, abolishing the central bank and removing all banking restrictions and regulations.

Solution 7. The correct answer is (d): Allow the common price level (nominal anchor) to be endogenously determined by the worldwide demand for, and supply of, gold.

Problem 8. Which of these is yet another of the rules entailed in the classical gold standard?

(a) Do not restrict exports or imports of gold by private citizens, nor impose any other exchange restriction on current or capital account transacting.
(b) Attempt to run a consistent trade surplus in order to accumulate as much gold as possible.
(c) Set up tariff barriers on foreign products so as to prevent gold from being redistributed to foreigners.
(d) Require a balance of trade among all nations on the gold standard.
(e) Require that, while gold-backed notes and goods may exchange hands, the physical gold must not leave a country's borders.

Solution 8. The correct answer is (a): Do not restrict exports or imports of gold by private citizens, nor impose any other exchange restriction on current or capital account transacting.

Problem 9. Which of these are still other rules entailed in the classical gold standard? More than one answer may be possible.

(a) Take gold out of circulation whenever price inflation occurs. Inject additional gold into the economy whenever price deflation occurs.
(b) Back national banknotes and coinage with earmarked gold reserves, and condition long-run growth in deposit money on availability of general gold reserves.
(c) Require the government to run a balanced budget.
(d) Fix interest rates to correspond with the rate of growth of the gold supply.
(e) Prohibit any agency other than a government mint from issuing coinage in gold.
(f) If gold convertibility is temporarily suspended, restore convertibility at traditional mint parity as soon as practical-if necessary by deflating the domestic economy.
(g) Legally bind all countries to convert between their national currency and gold at a fixed parity.
(h) In short-run liquidity crises from an international gold drain, have the central bank lend freely to domestic banks at higher interest rates.

Solution 9. The three remaining rules of the classical gold standard are

(b) Back national banknotes and coinage with earmarked gold reserves, and condition long-run growth in deposit money on availability of general gold reserves.
(f) If gold convertibility is temporarily suspended, restore convertibility at traditional mint parity as soon as practical-if necessary by deflating the domestic economy.
(h) In short-run liquidity crises from an international gold drain, have the central bank lend freely to domestic banks at higher interest rates.

Problem 10. Which of these phenomena did the classical gold standard render impossible? More than one answer may be correct.

(a) Deflation
(b) Hyperinflation
(c) Defaults on government debt
(d) Barter
(e) Free-floating currency exchange rates
(f) Central banking
(g) Discretionary monetary policy
(h) Paper money

Solution 10. Deflation, debt defaults, barter, central banking, and paper money (backed by gold) can still exist under a classical gold standard, but hyperinflation, free-floating currency exchange rates, and discretionary monetary policy cannot. Thus, (b), (e), and (g) are correct answers.

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.