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The International Gold Standard: Consider two countries, the U.S. (domestic) and U.K. (foreign), under the international gold standard. The central bank in each country offers
The International Gold Standard:
Consider two countries, the U.S. (domestic) and U.K. (foreign), under the international gold standard. The central bank in each country offers a fixed currency price for gold. This implies that the nominal exchange rate is fixed. Suppose price levels are completely flexible.
- (3 Points) If the Bank of England increases the money supply of U.K., what is the immediate effect on U.S.'s real exchange rate?
- (3 Points) What does the immediate real exchange rate response imply for U.S.'s current account balance?
- (4 Points) Explain how the resulting gold shipments will restore the current account balance between U.S. and U.K. under the price specie-flow mechanism.
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