Question

Under the gold standard, if Britain became more productive relative to the United States, what would happen to the money supply in the two countries? Why would the changes in the money supply help preserve a fixed exchange rate between the United States and Britain?

Short answer

The change in funds would affect the demand and provide of the currency of a rustic which might affect the rate of exchange. Under fixed charge per unit, the change in funds would occur only till the purpose where the rate of exchange between the 2 currencies reached to the identical level. Thus, the money supply in Britain would increase and in U.S would decrease under given situations.

Step-by-step solution

Concept Introduction 

Golden standard refers to the fixed charge per unit system under which each countries' currency is created convertible into some fixed amount of gold that also fixed the rate between these currencies.

Explanation of Solution 

The increased productivity in Britain would increase the amount of products within the Britain which might also increase the availability of products in it. The increased supply would scale back the worth of these goods which might decrease the worth of the rate for Britain. The increased productivity and decreased rate of exchange would make Britain goods cheaper and also the U.S demand for Britain goods would increase and it'll increase the charge per unit. The increased U.S demand for Britain goods would scale back the cash supply in U.S and increase the money supply in Britain.