This preview shows page 1. Sign up to view the full content.
Unformatted text preview: the shirt in terms of gold would be lower in the US and we would expect an outflow of gold from the
take it in two parts - first determine the prices in terms of gold: it takes 1/2 oz of gold to but the shirt in the UK and
8/10 an oz of gold in the US- so it is cheaper in the UK - people will buy it there - and the gold will flow out of US to
the UK price of ounce of gold
$30 price of shirt in terms of
currency before war
$20 price of shirt in terms of
currency after war
$20 9. After WWI England (UK) needed to make a decision regarding a return to the gold standard, and if they did return,
they needed to set the price of the pound () in terms of gold. The basics of the problem can be seen in the table above.
One of the problems was England had very high inflation rates during WW I that increased the price of goods produced
in England. If England went back on the gold standard at the pre war price of pounds, then what could we predict in
England if wages and prices were completely flexible as specified in the Classical model?
a. there would be...
View Full Document