Question

1. Consider the gold standard system. Suppose that Home price was increasing because of the price-specie-flow mechanism.


a) Which, surplus or deficits, was Home balance of payments in? Was the mechanism helping or hurting Home country’s exports?

b) Consider the rule-of-the-game. Which, buying or selling home financial assets, was Home supposed to do? Did home country have a strong incentive to follow the rule in the situation under the gold standard?

2. Consider the gold standard system. Home central bank decided to lower the price of gold. Which effect, contractionary or expansionary, would this have on the real output? How would general price level change?

Answer 1

a) Home country is in surplus and in long run, will hurt country's export. Countries with an increasing money supply would see inflation as the prices of goods and services rose while countries with a decreasing money supply would experience deflation as the prices of goods and services fell.The higher prices would, in the countries with a positive balance of trade, cause exports to decrease and imports to increase, which will alter the balance of trade downwards towards a neutral balance

b) In this case, home country is supposed to sell its home financial assets to reduce existing money supply in country thereby reducing prices

2.Lowering of gold price will have an expansionary impact on the economy.