The basic premise of the monetary approach is that:
A) Exchange rate movements change according to uncontrolled shocks.
B) Holdings of international reserves should be minimized.
C) Any balance of payments disequilibrium is based on a monetary disequilibrium.
D) People's willingness to hold money can alter exchange rates but not the balance of payments.

Question

Quizplus · Accepted Answer

The monetary approach to balance of payments asserts that any imbalance in the balance of payments is due to a monetary disequilibrium. This means that changes in the monetary supply, money demand, and interest rates all affect the balance of payments. The theory also emphasizes that central banks hold a significant impact on exchange rates and that minimizing international reserve holdings is not necessarily the objective. Therefore, option C, "Any balance of payments disequilibrium is based on a monetary disequilibrium" is the correct choice.

The Basic Premise of the Monetary Approach Is That