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Econ1539Final - This transaction set is between the US and...

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This transaction set is between the US and the Country “Europa” (a fictionary country with the currency €). The system is the International Gold Standard. 1) Joe Gold-digger found a good amount of gold in his cave and deposited it at his local bank (Bank of California) for XX amount of $ in his bank account. 2) Bank of California already have enough gold in their vault so they ship it to the Central bank for cash. 3) The treasury notice that the Central bank has an increased amount of gold and they feel like they could boost the economy a little by taking a loan from the central bank. 4) Joe Gold-digger fells like he could expand his business so he takes a loan from the local bank to buy some digging equipment. 5) Joe realizes that the equipment would be much cheaper if he bought it in Europa, so he buy’s it from Jimmy Europe (a citizen of Europa). 6) Jimmy Europe exchange his $ for a deposit of XX € at his local bank (Bank of Europa). 7) Bank of Europa knows that it can exchange $ for a certain amount of gold in the US so they call their buddies at Bank of California and exchanges their $ for gold. 8) Bank of Europa exchanges the gold for XX amount of € with Europa’s Central bank. 9) Bank of California, who sold their gold to Europa get in to a Short-run liquidity crisis and needs to lend money from the Central bank according to the Bagehot’s rule. 10)The min parity in the country can no longer hold and it becomes necessary to deflate the US economy.
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As seen from this set of transactions the international gold standard uses gold as a foreign exchange regulator. As the shovels were cheaper to purchase from Europa the gold streamed out of the US and in to Europa. Finally, the US had to deflate their economy to arrive at the same prices in shovels.
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