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

Question

BlackTom AI · Accepted Answer

An appreciation or depreciation alters the balance of payments primarily because the purchasing power of the currency changes.

1) Relevant knowledge points and concepts
- Monetary approach to the balance of payments: focuses on money supply, money demand, and price levels as the primary determinants of external equilibrium. Exchange rate movements work through changes in domestic purchasing power (real value of money).
- Purchasing power parity (PPP) intuition: an appreciated currency buys more foreign goods (higher purchasing power); a depreciated currency buys fewer foreign goods.
- Transmission to the current account: changes in purchasing power change import and export volumes and thus the trade balance, affecting the overall balance of payments.

2) Step-by-step reasoning
- Suppose the currency appreciates. Step 1: One unit of domestic currency now purchases more foreign currency and foreign goods—its purchasing power rises. Step 2: Imports become cheaper for domestic residents, so import demand rises. Step 3: Domestic goods become relatively more expensive for foreigners, so exports tend to fall. Step 4: The trade balance worsens (imports increase, exports decrease), producing a deficit contribution to the balance of payments.
- Conversely, if the currency depreciates, its purchasing power falls, imports become more expensive and decline, exports become more competitive and rise, improving the trade balance.
- Under the monetary approach these changes in trade flows (driven by purchasing power) are the mechanism by which exchange rate movements restore money market equilibrium and adjust international reserves.

3) Intermediate steps / no numerical calculation required
- Conceptual chain: Exchange rate change → change in purchasing power → change in relative import/export prices → change in trade flows → change in balance of payments.

4) Why the correct answer is correct
- The monetary approach interprets exchange rate effects through the real value (purchasing power) of domestic money rather than, for example, only through short-run interest-rate arbitrage or income effects.

5) Why other mechanisms are not primary (brief)
- Interest-rate channel (portfolio approach) emphasizes capital flows due to rate differentials—this is not the monetary approach’s main mechanism. Income/absorption effects emphasize demand-side fiscal factors. These are secondary to the monetary approach’s purchasing-power channel.

6) Conclusion
- Therefore, the correct mechanism is that an appreciation or depreciation alters the balance of payments via changes in the purchasing power of the currency, confirming the provided answer.

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

Similar Questions

Which is true regarding the monetary approach?

Which is true regarding the monetary approach?

Which of the following conversions results in the formation of a different shape around the carbon atom?

Consider compound X which is an ester:X reacted with hot aqueous sodium hydroxide solution and formed compounds M and N. X reacted with an aqueous sulfuric acid solution and produced compounds M and Q. M is a :

A compound, Y, when mixed with an aqueous solution of sodium carbonate, formed bubbles of gas. Compound Y:

Which of the following compounds would not turn acidified potassium dichromate green?

What is the product of the oxidation of 2-propanol with PCC?

Which pairing of alcohol and class is incorrect?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler