In the monetary approach to the balance of payments and the exchange rate,
A) an increase in the demand for money (with a fixed supply) would cause a balance-of-Payments deficit under fixed exchange rates.
B) an increase in the supply of money (with a fixed demand) would cause a balance- Of-payments surplus under fixed exchange rates.
C) a decrease in the demand for money (with a fixed supply) would cause a balance-of- Payments deficit under fixed exchange rates.
D) an increase in the supply of money (with a fixed demand) would cause the domestic Currency to appreciate under flexible exchange rates.

Question

Quizplus · Accepted Answer

A decrease in the demand for money, with a fixed supply, leads to excess money in the economy, causing a balance-of-payments deficit under fixed exchange rates as people convert excess domestic currency into foreign currency.

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