The price-specie-flow adjustment mechanism operates by the deficit nation losing gold and experiencing a reduction in its money supply.

Question

Quizplus · Accepted Answer

Under the price-specie-flow mechanism, a deficit nation (whose imports are greater than its exports) will experience an outflow of gold as it must pay for the deficit with its reserves or by borrowing. This results in a decrease in the money supply, as there is less gold available to back the currency, leading to deflationary pressures, which in turn make exports cheaper, and imports more expensive, eventually restoring equilibrium. Therefore, the correct statement is that the deficit nation loses gold and experiences a reduction in its money supply.

The Price-Specie-Flow Adjustment Mechanism Operates by the Deficit Nation Losing