International FINA Ch2 Questions

International FINA Ch2 Questions - INTERNATIONAL MONETARY...

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INTERNATIONAL MONETARY SYSTEM Chapter 2 Questions
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Question 2 Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard?
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Answer to Question 2 Under the gold standard, the price-specie- flow mechanism is an automatic correction of payment imbalances between countries. This is based on the fact that the domestic money stock rises or falls as the country experiences inflows and outflows of gold. For example, If Germany exports more goods to Italy than Italy exports to Germany, the net export of goods from Germany to Italy will be accompanied by a net flow of gold from Italy to Germany. This net flow of gold leads to a lower price level in Italy and a higher price level in Germany, which is consistent with the gold standard which states that domestic money stock is supposed to rise and fall as the country experiences an inflow or outflow of gold. The resultant change in the price level will slow exports from Germany and encourage imports from Italy. Due to the changes in price levels, the initial net export from Germany to Italy will eventually disappear.
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Question 3 Suppose that the pound is pegged to gold
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This note was uploaded on 06/06/2011 for the course FINA 4810 taught by Professor Hamilton during the Spring '08 term at UGA.

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International FINA Ch2 Questions - INTERNATIONAL MONETARY...

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