Which event is described as causing inflation under the gold standard?

• A. Discovery of gold
• B. War spending
• C. Increase in silver reserves
• D. Adoption of fiat money

Answer: (A)

When money is tied to gold, the amount of currency in circulation is constrained by how much gold the government holds. If a large new supply of gold is discovered, the gold stock increases, allowing the authorities to back more currency. More money in circulation with the same amount of goods pushes prices up, creating inflation. The discovery of gold directly expands the backing for money, so it best explains inflation under a gold standard. The other options don’t fit this mechanism: silver reserves don’t increase the gold-backed money, adopting fiat money abandons the gold standard, and war spending would only cause inflation under the gold standard if it led to expanding money beyond gold backing, which is not the standard implication.