ECON 4550 Chapter : Chapter 19 Practice Problems
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In contrast, such changes became frequent in the inter war period. Can you think of reasons for this contrast: under a gold standard, countries may adopt excessively contractionary monetary policies as all countries scramble in vain for a larger share of the limited supply of world gold reserves. Can the same problem arise under a reserve currency standard when bonds denominated in different currencies are all perfect substitutes: a central bank that adopts a fixed exchange rate may sacrifice its autonomy in setting domestic monetary policy. It is sometimes argued that when this is the case, the central bank also gives up the ability to use monetary policy to combat the wage-price spiral. The argument goes like this: suppose workers demand higher wages and prices down. What is wrong with this argument? wages and employers give in, but the employers then raise output prices to cover their higher costs.
