Describe the mechanism which would take place if the Bank of England decides to increase its money supply by purchasing domestic assets under the gold standard

What will be an ideal response?

The increase in Britain's money supply would push interest rates down and make foreign currency assets more attractive than domestic ones. Holders of pound deposits will attempt to sell them for foreign deposits. To accomplish this, they sell pound deposits to the Bank of England for gold and then use this gold to purchase foreign deposits. England loses foreign reserves since it is selling gold and foreign countries are gaining reserves. Equilibrium is re-established after Britain's money supply has fallen enough to force the British interest rate up until it is equally as attractive as the interest rate on foreign currency.