Which is true regarding the monetary approach?

Question

BlackTom AI · Accepted Answer

Monetary models of the balance of payments extend the price-elasticity logic by adding money supply/demand and price-level dynamics, so the correct answer is: It builds on the elasticity approach.

1. Relevant knowledge points and concepts
- Elasticity (Marshall–Lerner) approach: a currency depreciation improves the trade balance only if the sum of absolute price elasticities of exports and imports exceeds one. It focuses on relative prices and quantities.
- Monetary approach: balance of payments and exchange rates are determined by money supply and money demand. Under PPP or flexible prices, changes in money supply lead to proportional price-level changes and hence changes in real money balances, incomes/absorption, and net exports. The monetary approach therefore incorporates the elasticity condition but adds monetary and income channels.

2. Step-by-step reasoning
- Start with money market equilibrium: M/P = L(Y, i) (real money supply equals real money demand).
- If domestic money supply rises (or foreign falls), excess nominal money leads to a balance-of-payments deficit; exchange rate depreciates until price level adjusts.
- Under purchasing power parity, exchange-rate depreciation raises domestic prices relative to foreign prices, changing real export/import prices and quantities.
- The change in net exports depends on price elasticities (Marshall–Lerner). Monetary effects change prices and incomes, which in turn influence import demand (absorption effect).

3. Intermediate algebraic steps (illustrative)
- M/P = L(Y) (ignoring interest for simplicity). A proportional increase in M → proportional increase in P to restore M/P, so P↑.
- Real exchange rate q = EP*/P; if E depreciates and P rises, q changes affecting export/import volumes.
- ΔNX = f(Δq) where sign and magnitude depend on elasticities: ∂NX/∂q determined by εx + εm (Marshall–Lerner).

4. Why the correct answer is correct
- The monetary approach does not discard elasticity logic; it “builds on” it by explaining how monetary variables drive prices and incomes that then operate through price elasticities to affect the trade balance. Thus it is an extension that embeds the elasticity condition within a monetary framework.

5. Why other options are incorrect
- “It provides another reason why a depreciation may improve a trade deficit.” This is narrower: the monetary approach doesn’t merely offer “another reason”; it explains the transmission mechanism through money and prices and therefore is best described as building on the elasticity view.
- “It highlights the relationship between net exports and all the other components of production.” The monetary approach links net exports to money, prices, and absorption (income), not directly to “all components of production” as stated.
- “All of these” is false because the other two options are imprecise or incorrect.

6. Conclusion
The monetary approach builds on the elasticity approach by adding money-market and price-level channels to the elasticity condition; this matches the provided correct answer: It builds on the elasticity approach.

Which is true regarding the monetary approach?单项选择题

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The account showing financial transactions like stocks and bonds is the:

When an Australian exporter sells software to France and uses the proceeds to buy stock in a French company, Australian exports _ and there is a capital _ to/from Australia.[Fill in the blank]

When an Australian oil company purchases oil from Singapore and the Singaporean firm uses the proceeds from its sale of oil to Australia to buy Australian government debt, Australian _ and there is a capital _ to/from Australia.[Fill in the blank]

The elasticity approach emphasizes an appreciations or depreciation of the currency will alter the balance of payment accounts via how the:

The elasticity, absorption, and monetary approaches are about how:

The elasticity, absorption, and monetary approaches are about how:

Which is true regarding the absorption approach?

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Which is true regarding the monetary approach?单项选择题

类似问题

The account showing financial transactions like stocks and bonds is the:

When an Australian exporter sells software to France and uses the proceeds to buy stock in a French company, Australian exports _____ and there is a capital _____ to/from Australia.[Fill in the blank]

When an Australian oil company purchases oil from Singapore and the Singaporean firm uses the proceeds from its sale of oil to Australia to buy Australian government debt, Australian _____ and there is a capital _____ to/from Australia.[Fill in the blank]

The elasticity approach emphasizes an appreciations or depreciation of the currency will alter the balance of payment accounts via how the:

The elasticity, absorption, and monetary approaches are about how:

The elasticity, absorption, and monetary approaches are about how:

Which is true regarding the absorption approach?

更多留学生实用工具

希望你的学习变得更简单

When an Australian exporter sells software to France and uses the proceeds to buy stock in a French company, Australian exports _ and there is a capital _ to/from Australia.[Fill in the blank]

When an Australian oil company purchases oil from Singapore and the Singaporean firm uses the proceeds from its sale of oil to Australia to buy Australian government debt, Australian _ and there is a capital _ to/from Australia.[Fill in the blank]