1. cause gold to flow from A to B in the short-run.
2. cause gold to flow from B to A in the short-run.
3. cause the price level in A to rise in the long-run.
4. cause the world interest rate to rise in the short-run but remain unchanged in the long-run.
Choose the correct option.
Option 1 is the correct choice. World investment will shift from Country A to Country B, shifting A's IS curve to the left and B's IS curve to the right. Income will rise in B and fall in A, creating an excess demand for money in B and an excess supply of money in A. A-residents will buy non-monetary assets from B-residents in return for gold, so gold will flow from A to B. In the long-run, prices and wages will rise in B and fall in A, shifting world demand from B-goods to A-goods and shifting the countries' IS curves back to their original positions. The world interest rate will remain unchanged in both the short-run and the long-run because the world IS and LM curves are unaffected.
You should recognize this question as identical to the case analyzed above in which Country A imposes a tariff on imports from Country B, except that the shift of investment from A to B is equivalent here to a tariff in Country B on A-goods. World demand shifts from A to B in this case because investment shifts from A to B. In the case of a tariff it would usually be consumption that shifts. The real exchange rate has to change in both cases in the long run to undo the shift in aggregate demand so that the countries can return to full employment.