In the monetary approach to the balance of payments and the exchange rate, if there is an excess demand for money, the result is a balance-of-payments __________ in a fixed exchange rate situation and __________ of the country's currency in a flexible exchange Rate situation.
A) surplus; an appreciation
B) surplus; a depreciation
C) deficit; an appreciation
D) deficit; a depreciation

Question

Quizplus · Accepted Answer

In the monetary approach, an excess demand for money implies that people are trying to hold more money than is available. In a fixed exchange rate system, this leads to a balance-of-payments surplus as domestic currency is in high demand, and in a flexible exchange rate system, it leads to an appreciation of the currency as the demand for the currency increases.

In the Monetary Approach to the Balance of Payments and the Exchange