Under a gold standard, countries may adopt excessively contractionary monetary policies as all 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?
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Step 1: Under a reserve currency standard, when bonds denominated in different currencies are all perfect substitutes, a monetary contraction in one country will result in an increase in domestic interest rates, attracting foreign capital. Show more…
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