Practice question · Multiple choice
Under the gold standard, exchange rates followed from each currency’s gold content. Why does joining such a system cost a country its monetary independence?
Hints
- Ask what a country must do when gold starts flowing out.
- Can it cut rates to fight a recession while defending a parity?
Show the answer
A. An independent monetary policy, since rates defended the parity
Why
A fixed parity, free capital movement and independent monetary policy cannot coexist. The gold standard resolved the trilemma by surrendering the third, which is why it broke under the Depression.
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