Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses are the result of excess money demand in the home country?
A) Absorption approach
B) Elasticities approach
C) Monetary approach
D) Purchasing-power-parity approach

Question

Quizplus · Accepted Answer

The monetary approach suggests that balance-of-payments surpluses occur when there is excess demand for money in the home country, which leads to an increase in interest rates and a subsequent appreciation of the home currency. This makes exports more expensive and imports cheaper, leading to a decrease in exports and an increase in imports, ultimately resulting in a balance-of-payments surplus.

Which Approach to Balance-Of-Payments Adjustment Suggests That Balance-Of-Payments Surpluses Are