Describe the mechanism, which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the GOLD STANDARD.
The gold standard has three distinct monetary systems in which the standard economic unit of account is a fixed weight of gold. The gold specie standard is a system, which a monetary unit is associated with circulating gold coins, or with the unit of value circulating gold coin in conjunction with lesser coinage made from a lesser valuable metal. Similarly, the gold exchange standard involves circulation of only coins made of silver or other metals and finally, the gold bullion standard is a system in which gold coins do not circulate, but authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency.
The rules of a gold standard are simple: first, a country’s government declares its’ issued currency, (may be coin or paper currency) will exchange for a weight in gold. Second, in a pure gold standard, a country’s government declares that it will freely exchange currency for actual gold at designated exchange rate. This “rule of exchange” means that anyone can go to the central bank with coin or currency and walk out with pure gold. Equally, one could also walk in with pure gold and walk out with the equivalent in coin or currency. The gold standard did not give any country special status in the world and its big advantage is that it acts as an automatic restraint on increasing money supplies too quickly, preventing inflationary monetary policies from irresponsible governments.
The mechanism that will take place if the Bank of England increased its money supply to purchase domestic assets under Gold Standard would be price-specie flow mechanism, which is a description about how adjustments to shocks or changes are handled within a pure gold standard system. Price-specie flow mechanism is the adjustment of prices as gold “specie” flows in or...
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