Question

The price-specie-flow mechanism will work only if governments are willing to play by the rules of the game by letting the money stock rise and fall as gold flows in and out. Once the government demonetizes (neutralizes) gold, the mechanism will break down. In addition, the effectiveness of the mechanism depends on

Answer 1

Answer: The price elasticity of demand for imports

Explanation: The price-specie-flow mechanism is a model used to illustrate how trade imbalances can correct and adjust themselves under the gold standard. A rise in domestic prices due to the gold inflow would discourage exports and encourage imports, thereby automatically reducing the amount by which exports would exceed imports.

The price elasticity of demand is the extent or degree to which the desire for a commodity changes as its price increases. Under normal and ideal circumstances, the desire for a commodity reduces with increase in price of such commodity.

When government allows the money stock to rise and fall as gold flows in and out, the price elasticity shifts backward and forward as prices are directly proportional to demand and thereby the system regulates itself.

Answer 2

The price elasticity of the demand for imports.

Step-by-step explanation:

The price-specie-flow mechanism will work only if governments are willing to play by the rules of the game by letting the money stock rise and fall as gold flows in and out. Once the government demonetizes (neutralizes) gold, the mechanism will break down. In addition, the effectiveness of the mechanism depends on the price elasticity of the demand for imports.