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?单项选择题

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