If a country starts at a point where its money demand matches the money supply and its balance of payments is balanced, economic theory predicts that the country’s balance of payments will shift to a surplus if there is a(n):

Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.

Explanation

An increase in the demand for money leads to a higher demand for domestic currency, which can improve the balance of payments and result in a surplus. Conversely, a decrease in money demand would not produce this effect.

Practice related questions from the same subject.

1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?

If a country starts at a point where its money demand matches the money supply and its balance of payments is balanced, economic theory predicts that the country’s balance of payments will shift to a surplus if there is a(n):

Explanation

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