Practice question · Multiple choice
A country under the gold standard runs a trade deficit. According to the price-specie flow mechanism, what happens next?
Hints
- How do you pay for imports under gold? Ship gold.
- Less gold in circulation means what for prices?
Show the answer
A. Gold flows out, prices fall, trade rebalances
Why
Hume's mechanism: gold outflow → deflation → cheaper exports → rebalancing. The self-correction is real but painful, the adjustment cost is unemployment and falling wages.
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