The MABP implies that the change in international reserves equals to the foreign inflation rate plus the growth rate of domestic output minus the change in domestic money creation.

Question

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This is the basic equation of the Monetary Approach to Balance of Payments (MABP). It states that the change in international reserves (as a percentage of the initial level) equals the difference between the foreign inflation rate and the domestic inflation rate (which is equal to the growth rate of domestic output minus the change in domestic money creation). This equilibrium condition holds in the long run, assuming that the exchange rate is flexible and that there are no capital flows or other external factors that affect the balance of payments.

The MABP Implies That the Change in International Reserves Equals