Between 1879 and 1914, the world's major nations adhered to the gold standard. Under the gold standard, a country maintained a fixed relationship between its stock of gold and its money supply. Suppose that Great Britain defined a British pound as 160 grains of gold, and the United States defined $1 as 200 grains of gold. Under the gold standard, a British pound would have been worth U.S. dollars. Suppose the fixed exchange rate is $0.80 per pound. Suppose that an increase in the price level in the United States leads to an increase in imports from Great Britain. On the following graph, shift the relevant curve or curves to illustrate the described changes. Then use the black points (cross symbol) to indicate the imbalance. PRICE OF A POUND (In Dollars) 1.6 1.2 0.8 0.4 0 4 8 Supply for pounds Demand for pounds Demand for pounds 12 16 QUANTITY OF POUNDS (Millions) Supply for pounds The Imbalance An increase in the price level in the United States leads to an increase in imports from Great Britain. As a result, the demand for British pounds causing a million imbalance in the U.S. balance of payments. Under the gold standard, how is the fixed exchange rate maintained in the face of the balance-of-payments imbalance shown on the previous graph? The IMF must lend pounds to the United States with which to buy dollars. Gold must flow from Great Britain to the United States. Gold must flow from the United States to Great Britain. The IMF must lend dollars to Great Britain with which to buy pounds.
Between 1879 and 1914, the world's major nations adhered to the gold standard. Under the gold standard, a country maintained a fixed relationship between its stock of gold and its money supply. Suppose that Great Britain defined a British pound as 160 grains of gold, and the United States defined $1 as 200 grains of gold. Under the gold standard, a British pound would have been worth U.S. dollars. Suppose the fixed exchange rate is $0.80 per pound. Suppose that an increase in the price level in the United States leads to an increase in imports from Great Britain. On the following graph, shift the relevant curve or curves to illustrate the described changes. Then use the black points (cross symbol) to indicate the imbalance. PRICE OF A POUND (In Dollars) 1.6 1.2 0.8 0.4 0 4 8 Supply for pounds Demand for pounds Demand for pounds 12 16 QUANTITY OF POUNDS (Millions) Supply for pounds The Imbalance An increase in the price level in the United States leads to an increase in imports from Great Britain. As a result, the demand for British pounds causing a million imbalance in the U.S. balance of payments. Under the gold standard, how is the fixed exchange rate maintained in the face of the balance-of-payments imbalance shown on the previous graph? The IMF must lend pounds to the United States with which to buy dollars. Gold must flow from Great Britain to the United States. Gold must flow from the United States to Great Britain. The IMF must lend dollars to Great Britain with which to buy pounds.
Chapter1: Making Economics Decisions
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Transcribed Image Text:Between 1879 and 1914, the world's major nations adhered to the gold standard. Under the gold standard, a country maintained a fixed relationship
between its stock of gold and its money supply. Suppose that Great Britain defined a British pound as 160 grains of gold, and the United States
defined $1 as 200 grains of gold.
Under the gold standard, a British pound would have been worth
U.S. dollars.
Suppose the fixed exchange rate is $0.80 per pound. Suppose that an increase in the price level in the United States leads to an increase in imports
from Great Britain.
On the following graph, shift the relevant curve or curves to illustrate the described changes. Then use the black points (cross symbol) to indicate the
imbalance.
PRICE OF A POUND (In Dollars)
1.6
1.2
0.8
0.4
0
4
8
Supply for pounds
Demand for pounds
Demand for pounds
12
16
QUANTITY OF POUNDS (Millions)
Supply for pounds
The Imbalance
Transcribed Image Text:An increase in the price level in the United States leads to an increase in imports from Great Britain. As a result, the demand for British pounds
causing a
million imbalance in the U.S. balance of payments.
Under the gold standard, how is the fixed exchange rate maintained in the face of the balance-of-payments imbalance shown on the previous graph?
The IMF must lend pounds to the United States with which to buy dollars.
Gold must flow from Great Britain to the United States.
Gold must flow from the United States to Great Britain.
The IMF must lend dollars to Great Britain with which to buy pounds.
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