Question

Assume that when digging to plant flowers at the backyard of collage or company , we strike a very rich vein of gold. If the government (a) monetises (b) sterilises this windfall how will the sterling pound – US dollar exchange rate be affected?.

Answer 1

a) In this case, monetization occurs through exports (assuming the gold is dug in England). Hence, the sterling pound currency becomes stronger when comapared to US dollar. As the demand increases, the currency becomes more stronger.

b) In this case, I assume that the government just removes the gold. When the central bank buys this gold from the government, there is a possibility of inflation in the economy because banks need to print more money to buy gold. When a sudden excess of money enters the economy, the demand increases against the supply thus causing inflation, which means the currency is weaker when compared to the US dollar.

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