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?

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

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A reduction in the money supplyAn expansion of the money supplyA decline in the demand for moneyNone of these choices

Explanation

A decrease in the money supply tends to raise interest rates, attracting foreign capital and improving the balance of payments, thereby creating a surplus. Conversely, increasing the money supply or lowering money demand would not have 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.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?
5.In a floating exchange rate system, what effect would a decline in income in the United States have on the demand for imports and foreign currency?

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?

Explanation

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