Which is true regarding the monetary approach?

Question

BlackTom AI · Accepted Answer

The monetary approach treats balance-of-payments and exchange-rate outcomes as driven by monetary variables: money supplies, money demand, and resulting price-level adjustments.

1) Relevant knowledge points and concepts
- Quantity theory of money: M · V = P · Y; with stable V and given Y, price level P is proportional to nominal money supply M.
- Purchasing Power Parity (PPP): long-run exchange rates reflect relative price levels across countries.
- Monetary approach to the balance of payments: BOP disequilibria are monetary phenomena — surplus or deficit arises from a mismatch between money supply and money demand; adjustment comes via price-level changes affecting exchange rates and external flows.
- Price flexibility and price-level adjustment are assumed (especially in the long run).

2) Step-by-step reasoning
- Start with an increase in domestic money supply (M↑). With V and Y roughly fixed, P must rise (P↑) per the quantity theory.
- Under PPP, a higher domestic P implies a depreciation of the domestic currency (exchange rate E increases).
- Depreciation and higher domestic prices reduce net exports and cause gold/foreign reserves outflows (traditional mechanism), but primary origin is the monetary expansion.
- Conversely, a reduction in money supply leads to lower prices and currency appreciation.
- Thus balance-of-payments positions are explained by monetary disequilibrium rather than purely trade or real shocks.

3) Intermediate logical steps
- M↑ → (M·V constant V) → P↑ (since Y fixed) → E↑ (PPP) → external adjustments follow.

4) Why the correct answer is correct
- Statements typically offered as true under the monetary approach (that BOP is monetary, that money supply determines long-run price levels and exchange rates, and that price flexibility allows adjustment) all follow directly from the above logic. Therefore the choice "all of these" correctly summarizes the approach.

5) Why other options are incorrect (brief)
- If other individual options assert any single feature (e.g., “BOP is monetary,” “exchange rates determined by money supplies,” or “prices adjust”), none are incorrect; they are each a correct component. Hence choosing any single one is incomplete, making “all of these” the best answer.

6) Conclusion
- The explanation confirms that all standard statements about the monetary approach are true; therefore the correct answer is “all of these,” matching the provided answer.

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

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