What Is The Adjustment With Fixed Exchange Rate?

Understanding the gold standard is important not only because of its historical role but also because it is a pure example of a fixed exchange rate system. The same analysis applies to all fixed exchange rate systems: If exchange rates are not free to move when the prices or incomes among countries get out of line, domestic prices and incomes must adjust to restore equilibrium. If Europe decides to adopt a common currency, the mechanism by which adjustments will occur is similar to that under a gold standard.

In Hume's mechanism it is gold flows that move prices and wages and ensure equilibrium. In modern macroeconomic thinking output and employment are also part of the international adjustment mechanism. The necessity of having real output and employment adjust to ensure relative price equilibrium among countries on a fixed exchange rate is a crucial dilemma faced by countries considering a fixed exchange rate. The same question arises in Europe's decision on whether to adopt a common currency. I think this answer will satisfy your question that what is the adjustment with fixed exchange rate.