Suppose the world was on the gold standard. If Peru ran persistent trade deficits, ( \(\mathrm{OO} 3)\) a) Peru would be able to continue doing so with no consequences b) Peru's money stock would decline, its prices would fall, and its trade deficit disappear c) Peru would soon suffer from inflation d) Peru would raise tariffs and prohibit the shipment of gold from the country

Remember that a trade deficit occurs when a country's imports exceed its exports. Also, it's important to know that under the gold standard all currency is backed by gold, meaning the value of money is directly linked to the country's gold reserves. a) 'Peru would be able to continue doing so with no consequences': This is unlikely because in a gold-standard regime, persistent trade deficits would lead to a decrease in gold reserves, directly impacting the nation's currency. b) 'Peru's money stock would decline, its prices would fall, and its trade deficit disappear': This outcome is plausible. When trade deficits persist, the nation would need to pay its foreign partners using its gold reserves. As these reserves diminish, it leads to a reduction in money supply, leading to declining prices. These lower prices can stimulate higher demand for the nation's goods among foreign partners (increasing exports), helping to balance out the trade deficit. c) 'Peru would soon suffer from inflation': This is opposite of what we would expect. Inflation often occurs in scenarios where there's a rapid increase in money supply. But in this scenario, it's the gold reserves (and thus money supply) that's decreasing, which would potentially lead to deflation (fall in prices), not inflation. d) 'Peru would raise tariffs and prohibit the shipment of gold from the country': This would be a policy response rather than an automatic economic outcome. Increasing tariffs could discourage imports, thereby reducing the trade deficit. Prohibiting the shipment of gold would be an attempt to maintain gold reserves, but it would contradict the fundamental principles of the gold standard, which requires them to be exchangeable for currency at any given time.

If Peru is operating under a gold standard system and has persistent trade deficits, the most plausible scenario would be (b): 'Peru's money stock would decline, its prices would fall, and its trade deficit would disappear'. This result reflects the basic operations of the gold standard, where persistent trade deficits decrease the gold reserves and subsequently the money supply. This decrease in money supply could lead to deflation, making the nation's exports more competitive, which can eventually eliminate the trade deficit.