The price-specie-flow mechanism
A) is an automatic mechanism for assuring external balance under floating exchange rates.
B) is an automatic mechanism for assuring external balance under the gold standard.
C) is an automatic mechanism for assuring internal balance under floating exchange rates.
D) is an automatic mechanism for assuring internal balance under the gold standard.
E) is an automatic mechanism for assuring internal balance under mercantilism.

Question

Quizplus · Accepted Answer

The price-specie-flow mechanism is an automatic mechanism for assuring external balance under the gold standard. It functions by adjusting the balance of payments equilibrium through the flow of gold between countries. For example, when a country runs a trade surplus, it receives payment in gold, which increases its money supply, raises its prices, and makes its exports relatively more expensive, ultimately leading to a decrease in exports and an increase in imports until the balance of payments is restored. Conversely, when a country runs a trade deficit, it loses gold, which decreases its money supply, lowers its prices, and makes its exports relatively cheaper, ultimately leading to an increase in exports and a decrease in imports until the balance of payments is restored.

The Price-Specie-Flow Mechanism