Consider the case of a gold standard economy, a. What effect would you expect an
ID: 1190743 • Letter: C
Question
Consider the case of a gold standard economy, a. What effect would you expect an increase in the price of gold to have on the level of domestic real GDP, and why? b. What effect would you expect the change in real GDP to have on net exports? c. What is the net effect of the increase in the price of gold and the change in real GDP on net exports, and why? Consider the case of a gold standard economy, a. What effect would you expect an increase in the price of gold to have on the level of domestic real GDP, and why? b. What effect would you expect the change in real GDP to have on net exports? c. What is the net effect of the increase in the price of gold and the change in real GDP on net exports, and why? a. What effect would you expect an increase in the price of gold to have on the level of domestic real GDP, and why? b. What effect would you expect the change in real GDP to have on net exports? c. What is the net effect of the increase in the price of gold and the change in real GDP on net exports, and why?Explanation / Answer
a) An increase in the price of gold would devalue the mint parity, therebymaking domestic goods cheaper, shifting the GM curve to the right, andincreasing the equilibrium level of domestic real GDP.
b) Taken by itself, the increase in real GDP would tend to reduce net exportsby increasing the demand for imports. No other determinants of netexports would change
c) Despite the negative effect of th4e increase in real GDP on net exports, thenet effect would be toincreasenet exports, as can be verified from theabsorption approach