Suppose that international trade is the only kind of international transaction between the United States and Canada. The United States currently is experiencing a balance of trade deficit with Canada. What would happen to the United States and Canadian money supplies if the United States and Canada both used the gold standard?
A) The U.S. money supply would rise and the Canadian money supply would fall.
B) Both the U.S. and Canadian money supplies would rise.
C) The U.S. money supply would fall and the Canadian money supply would rise.
D) Both the U.S. and the Canadian money supplies would fall.

Question

Quizplus · Accepted Answer

Under the gold standard, a country with a trade deficit would pay for its imports with gold, reducing its money supply, while the country with a trade surplus would receive gold, increasing its money supply. Therefore, with the U.S. experiencing a trade deficit with Canada, the U.S. money supply would fall and the Canadian money supply would rise.

Suppose That International Trade Is the Only Kind of International