Monetary Economics
ECON 640
Susheng Wang
May 2000
Chapter 1: U.S. Banking System
Chapter 2: Hong Kong Banking System
Chapter 3: Money Demand and Supply
Chapter 4: IS-LM Framework
Chapter 5: In– ation
Chapter 6: Money and Output
Chapter 7: Monetary Policy
Chapter 8: International Money
Chapter 9: Commodity-Money Economy

4. Bimetallism
Bimetallic system: two commodities (gold and silver) serve as
money. Still, the dollar serves as the medium of exchange. The monetary
authority stands ready to buy and sell gold and silver at given prices Pg
and Ps:
E.g., for US, 1934“ 1964, Pg = 20:672 and Ps = 1:292 for an ounce.
Pg=Ps = 16:
1. Gresham¤s law: bad money drives out good money. In nonmonetary
uses, the equilibrium condition is
MRSg;s =
Pg
Ps
:
If MRSg;s < 16; some silver will get out of monetary circulation
and go into nonmonetary uses. It is therefore likely that only one
metal will be used as money.
2. Why a bimetallic system?
¤It reduces SR price – uctuations caused by money demand
shocks is less.
&acute;
M
P
&macr;d
" ) Pg=P "; Ps=P " ) Gold and silver
move into monetary circulation. Since there are two metals, P
will not have to fall as much as for one metal.
¤Real reason may be the support from debtors who want a high
P: Since
MRSg;goods =
Pg
P
:
when Pg " as demand for gold is up, P " :



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