What is a problem with the gold standard according to the material?

• A. Money supply could expand easily
• B. Led to deflation
• C. Caused rapid inflation
• D. Had no impact on economic growth

Answer: (B)

A gold standard binds the money supply to gold reserves, so the amount of currency that can be issued can’t expand quickly in response to growing demand or output. When the economy grows but the gold supply doesn’t keep up, there isn’t enough money chasing goods, and price levels tend to fall—deflation. This deflation is a problem because it raises the real burden of debt and can dampen spending and investment, slowing economic activity. The other options don’t fit: the system prevents easy expansion of the money supply, isn’t typically associated with rapid inflation, and it does affect growth through monetary constraints rather than leaving growth untouched.