Under the gold standard, when a nation had a deficit in its balance of payments
A) interest rates would rise which would reduce foreign investment.
B) interest rates would fall which would increase foreign investment.
C) gold would flow to foreign residents and the domestic money supply would decrease.
D) gold would flow into the country leading to an increase in the domestic money supply.

Question

Quizplus · Accepted Answer

Under the gold standard, a deficit in the balance of payments leads to an outflow of gold to foreign residents. This decreases the domestic money supply as there is less gold to back up the currency. Therefore, choice C is the correct answer. Choices A and B are incorrect because they assume that interest rates would have the opposite effect of what actually occurred. Choice D is incorrect because a deficit would result in an outflow of gold, not an inflow.

Under the Gold Standard, When a Nation Had a Deficit