Reference no: EM133076590

The Gold Standard Question

Consider the numbers for China, US and Canada shocks in your previous assignment, but now set these in a gold standard context. For convenience, allow the two large countries to have a weight of 50% each. Fixed exchange rates are assumed between all currencies, Consider the following shocks:

                          Y1        Y2

China 50            6%      10%

US 50                6%       5%

Canada              4%       2%

a. Complete Table C below, determining percentage changes in world prices and gold flows in the case where neither large country sterilizes.

	dY1	dY2	dP	dP*	dG	dGR	Deficit/Surplus
China 50
US 50
Canada 0

b. Can you explain why BOP adjustments occur in Canada? Place the appropriate numbers in Table C.

c. Now suppose the US was successfully able to sterilize its gold flow. Show the new results in Table D below.

	dY1	dY2	dP	dP*	dG	dGR	Deficit/Surplus
China 50
US 50
Canada 0

d. Explain why Canada's BOP situation has changed as a consequence of the US's attempt to sterilize.

e. What would ultimately happen if both China and the US attempted to sterilize? What would happen to Canada in the process?