Friday, March 27, 2009

David Hume-The price-specie-flow mechanism (3)

3- prefect competition in both product and factor markets is assumed in order to establish the necessary link between price behavior and wage behavior ,as well as to guarantee that prices and wages are flexible in both an upward and a downward direction .
4- Finally ,it is assumed that a gold standard exists .Under such a system ,all currencies are pegged to gold and hence to each other,all currencies are freely convertible into gold ,gold can be bought and sold at will ,and governments do not offset the impact of the gold flows by other activities to influence the money supply .This is sufficient to establish the link between movements of specie and changes in a nation is money supply .
If all these assumptions are satisfied,the automatic adjustment mechanism will ,allowing time for responses to occur ,restore balanced trade any time it is disrupted .Balance-of-payments adjustment mechanisms and the gold standard are still prominent in discussions of international monetary economics .

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