An article in the Economist magazine observes One big reason

An article in the Economist magazine observes: “One big reason to tie money to a commodity standard would be to limit its growth in order to protect against runaway inflation.” Source: “on Gold and Golden Ages”. Economist, September 11, 2012     (2 points)

a. Why would tying money to a commodity limit the growth of the money supply?

b. Would doing so limit inflation? Explain

Solution

a.) Tying money to a commodity standard would limit the growth of the money supply.A monetary system with commodity standard implies that money price of some commodity to be fixed.Money supply adjusts to keep constant prices.Under commodity standard, supply and demand create scarcity of reserve commodity that limits the growth of money supply.Price stability can be achieved by mechanisms (automatic)for the control of money supply.

b.)Inflation is caused by printing more money.Inflation happens when increase in supply of money is more than increase in supply of goods and services.If commodity standard can limit the growth of money supply ( as mentiones in part (a) ) , then inflation can also be controlled due to limit on growth of money supply.