Which is true regarding the monetary approach?

Question

BlackTom AI · Accepted Answer

The monetary approach links the price level directly to money supply and money demand, so the statement that it "highlights the relationship between price level and demand for money" is correct.

1) Relevant knowledge points and concepts
- Quantity theory identity: M · V = P · Y (money supply times velocity equals price level times real output).  
- Money demand specification: Md = k · P · Y (Cambridge k-form), where k is the inverse of velocity or the fraction of nominal income held as money.  
- Monetary approach to the balance of payments and exchange rates: long-run nominal exchange rates and price levels are functions of money supplies, real output, and money demand parameters; monetary disequilibria adjust via price level changes.

2) Step-by-step reasoning
- Start with money market equilibrium: Ms = Md.  
- Using Md = k · P · Y, set Ms = k · P · Y.  
- Solve for the price level: P = Ms / (k · Y). This shows P is proportional to the nominal money supply and inversely proportional to real output and the money-demand parameter k.

3) Intermediate calculation steps
- Given Ms = Md and Md = kPY, Ms = kPY.
- Rearranging: P = Ms / (kY).
- Alternatively from M·V = P·Y, with V = 1/k: P = M·V / Y, the same qualitative dependence.

4) Why the correct answer is correct
- The derived equations explicitly show price level P depends on money supply Ms and the demand parameter k (which captures the demand for money relative to nominal income). Thus the monetary approach indeed highlights the relationship between price level and demand for money.

5) Why other options are incorrect
- "It contradicts the conclusions of the elasticity approach.": The elasticity approach (J-curve/Marshall-Lerner condition) concerns how depreciation affects trade balance via import/export price elasticities; it operates in a different domain and time horizon and is not inherently contradicted by the monetary approach. They are complementary, not direct contradictions.  
- "It provides another reason why a depreciation may improve a trade deficit.": The monetary approach focuses on money supply, price levels and long-run exchange rates; it does not primarily present an alternative mechanism for how depreciation improves trade balance (that is the elasticity approach).  
- "all of these": Since the other two statements are incorrect or not true implications of the monetary approach, "all of these" is false.

6) Conclusion confirming the answer
- Therefore, the correct statement is: "It highlights the relationship between price level and demand for money," which matches the provided answer.

Which is true regarding the monetary approach?Single choice

Similar Questions

Which is true regarding the monetary approach?

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

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