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The international gold standard

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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 a fixed currency price for gold. This implies that the nominal exchange rate is fixed. Suppose price levels are completely flexible.

  1. If the Bank of England increases the money supply of U.K., what is the immediate effect on U.S.'s real exchange rate?
  2. What does the immediate real exchange rate response imply for U.S.'s current account balance?
  3. Explain how the resulting gold shipments will restore the current account balance between U.S. and U.K. under the price specie-flow mechanism.

Reference no: EM132813947

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