Although the assumption hitherto made (of a 1% change in price level during every adjustment interval) implies a very rapid change (if the adjustment interval is two months), we shall now assume a movement twice as rapid.
In this case, the index number will be 102 at the end of the first adjustment interval. This deviation calls for an increase of 2% in the dollar's weight, but the brassage charge limits this increase to 1%. Hence, at the end of the second interval the index number is acted upon by two forces, the restraining influence (from the increased weight of the dollar) of —1% and the tendency to a further increase of +2%. The net result is +1%; that is, the index number becomes 103. At the next adjustment period a similar conflict between a 1% decrease and a 2% increase causes the index number to become 104, and this process continues. In short, instead of increasing by 2% each adjustment interval, the index number increases by 1%. The stabilization process, under these circumstances, cannot altogether control the price tendency, as long as this continues upward, but can decrease it by half. On the reverse movement, after passing par, the movement below par is similarly retarded by stabilization.
If, however, the brassage limitation permitted a larger adjustment, the restraint would, of course, be more effective. We shall see this clearly after the effects of different amounts of brassage are shown.
(b) Conclusion as to tendency.
We conclude that the greater the tendency of the index number to vary, the further the index number will deviate from par before being arrested—especially if the tendency exceeds the brassage—but that, unless the tendency to change is very great or long continued or both, the index number will still stay close to par.
D. Changing the Assumption as to the "Brassage."
(a) Assumptions same as in standard case except: brassage changed from 1% to 2%.
The results are exactly the same as in the standard
