Under which of the following systems will an imbalance in trade be most likely to cause changes in a country's money supply and price levels,leading to a restoration of trade equilibrium?
A) the gold standard
B) the multinational exchange standard
C) the stable exchange standard
D) flexible exchange rates
E) equation of exchange rates

Question

Quizplus · Accepted Answer

Under the gold standard, a country's money supply is directly tied to its gold reserves. Therefore, if a country experiences an imbalance in trade (i.e. imports exceed exports), gold will flow out of the country to pay for the excess imports. As a result, the country's money supply will decrease, leading to deflation (decrease in price levels). This, in turn, will make exports cheaper and imports more expensive, helping to restore equilibrium in trade. Therefore, the gold standard is likely to cause changes in a country's money supply and price levels in response to trade imbalances.

Under Which of the Following Systems Will an Imbalance in Trade