Exam 22: The Monetary and Portfolio Balance Approaches to External Balance

If M_s is the money supply, BR = reserves of commercial banks (depository institutions), C = currency held by the nonbank public, and a = the money multiplier, then

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Question 1

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In the monetary approach to the exchange rate, a decrease in income in country I Will, other things equal, lead to an money in country I and therefore to of country I's currency against other currencies.

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Question 2

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Why do the monetary approach and the portfolio balance approach have different expected signs for the impact of a change in the domestic interest rate on the exchange rate? Explain carefully.

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The monetary approach and the portfolio balance approach have different expected signs for the impact of a change in the domestic interest rate on the exchange rate because they are based on different underlying assumptions and mechanisms.

The monetary approach, also known as the asset market approach, focuses on the relationship between the money supply, interest rates, and the exchange rate. According to this approach, an increase in the domestic interest rate will lead to an inflow of foreign capital seeking higher returns on domestic assets. This increased demand for domestic currency will cause the exchange rate to appreciate. Therefore, the monetary approach expects a positive relationship between domestic interest rates and the exchange rate.

On the other hand, the portfolio balance approach emphasizes the role of asset prices and portfolio allocation decisions in determining exchange rates. According to this approach, an increase in the domestic interest rate will lead to a shift in portfolio preferences towards domestic assets, as they offer higher returns. This shift in demand for domestic assets will lead to an increase in the demand for domestic currency, causing the exchange rate to appreciate. Therefore, similar to the monetary approach, the portfolio balance approach also expects a positive relationship between domestic interest rates and the exchange rate.

In summary, both the monetary approach and the portfolio balance approach expect an increase in the domestic interest rate to lead to an appreciation of the exchange rate. This is because higher domestic interest rates attract foreign capital and lead to a shift in portfolio preferences towards domestic assets, both of which increase the demand for domestic currency and cause the exchange rate to appreciate. Therefore, despite their different theoretical foundations, both approaches have the same expected sign for the impact of a change in the domestic interest rate on the exchange rate.

Which one of the following, other things equal, would NOT cause an increase in the Amount of money demanded in country A?

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Question 4

In the monetary approach to the balance of payments and the exchange rate, if there is an excess demand for money, the result is a balance-of-payments in a fixed exchange rate situation and of the country's currency in a flexible exchange Rate situation.

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Question 5

Because of widespread risk aversion in the financial sector in recent years, commercial banks in the United States have tended to hold excess reserves than would otherwise have been the case. A result of this bank behavior is that the "money multiplier" in the U.S. economy is than would otherwise have been the case.

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Question 6

In a situation of a fixed exchange rate, explain why, in the monetary approach, an excess supply of money leads to a balance-of-payments deficit. Why is the deficit only temporary? How might advocates of the monetary approach explain a long-lasting deficit in the balance of payments?

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Question 7

In the monetary approach to the exchange rate, which one of the following will cause a depreciation of A's currency relative to B's currency?

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Question 8

In the portfolio balance model, other things equal, the issuance of new bonds by a home corporation will the domestic interest rate and, especially if home and Foreign bonds are very good substitutes for each other, will lead to of the Home currency.

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Question 9

in the expected rate of depreciation of the home currency) 12. The term xa in the textbook is defined as the expected rate of appreciation of the foreign currency. A mathematical way to express this definition [where e is the spot rate of the foreign currency and E(e) is the expected future spot rate of the foreign currency] is __________.

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Question 10

In the asset market or portfolio balance approach, other things equal, a depreciation of the home currency would be caused by in inflationary expectations in the home country and by in real income in the home country.

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Question 11

In the monetary approach to the balance of payments and the exchange rate,

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Question 12

In the Dornbusch "overshooting" model, asset markets adjust rapidly to disturbances than do goods markets, and therefore the exchange rate and the price level proportionately to each other in the short run.

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Question 13

If i_d is the domestic interest rate, i_f is the foreign interest rate, xa is the expected rate of appreciation of the foreign currency (or the expected rate of depreciation of the home currency), and financial capital is mobile across countries (and assuming no risk premium), then equilibrium in international financial asset markets is indicated by the expression

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Question 14

Under a system of flexible exchange rates, the portfolio balance approach suggests that an increase in real income in a home country will lead to of that country's Currency; under flexible rates, the monetary approach suggests that an increase in real Income in a home country of that country's currency.

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Question 15

In the portfolio balance model, other things equal, an increase in home country wealth because of a current account surplus

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Question 16

In considering the demand for money in the monetary approach to the balance of payments, it can be said that the money demand would increase if home real income and if the home interest rate .

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Question 17

Suppose that, for a country, its money supply (M^s) is at the moment equal to its demand for money (M^d). Now suppose that the country's central bank pumps new money into the economy. The result of this central bank action, other things equal, is that there will be under flexible exchange rates and a consequent of the country's currency.

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Question 18

In the portfolio balance approach, which one of the following, other things equal, will cause an increase in the demand for domestic bonds by home country citizens?

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Question 19

If e is the current spot rate (units of home currency per unit of foreign currency), e_fwd is the current three-months forward rate, E(e) is the expected spot rate in three months, and xa is the expected rate of depreciation of the home currency in three months, then, in an efficient foreign exchange market,

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Question 20

Showing 1 - 20 of 24

Exam 22: The Monetary and Portfolio Balance Approaches to External Balance

If Ms is the money supply, BR = reserves of commercial banks (depository institutions), C = currency held by the nonbank public, and a = the money multiplier, then

In the monetary approach to the exchange rate, a decrease in income in country I Will, other things equal, lead to an __________ money in country I and therefore to __________ of country I's currency against other currencies.

Why do the monetary approach and the portfolio balance approach have different expected signs for the impact of a change in the domestic interest rate on the exchange rate? Explain carefully.

Which one of the following, other things equal, would NOT cause an increase in the Amount of money demanded in country A?

In the monetary approach to the balance of payments and the exchange rate, if there is an excess demand for money, the result is a balance-of-payments __________ in a fixed exchange rate situation and __________ of the country's currency in a flexible exchange Rate situation.

In a situation of a fixed exchange rate, explain why, in the monetary approach, an excess supply of money leads to a balance-of-payments deficit. Why is the deficit only temporary? How might advocates of the monetary approach explain a long-lasting deficit in the balance of payments?

In the monetary approach to the exchange rate, which one of the following will cause a depreciation of A's currency relative to B's currency?

In the portfolio balance model, other things equal, the issuance of new bonds by a home corporation will __________ the domestic interest rate and, especially if home and Foreign bonds are very good substitutes for each other, will lead to __________ of the Home currency.

In the asset market or portfolio balance approach, other things equal, a depreciation of the home currency would be caused by __________ in inflationary expectations in the home country and by __________ in real income in the home country.

In the monetary approach to the balance of payments and the exchange rate,

In the Dornbusch "overshooting" model, asset markets adjust __________ rapidly to disturbances than do goods markets, and therefore the exchange rate and the price level __________ proportionately to each other in the short run.

In the portfolio balance model, other things equal, an increase in home country wealth because of a current account surplus

In considering the demand for money in the monetary approach to the balance of payments, it can be said that the money demand would increase if home real income __________ and if the home interest rate __________.

In the portfolio balance approach, which one of the following, other things equal, will cause an increase in the demand for domestic bonds by home country citizens?

Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo

The Classical World of David Ricardo and Comparative Advantage

Extensions and Tests of the Classical Model of Trade

Introduction to Neoclassical Trade Theory: Tools to Be Employed

Gains From Trade in Neoclassical Theory

Offer Curves and the Terms of Trade

The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

Empirical Tests of the Factor Endowments Approach

Post Heckscher-Ohlin Theories of Trade and Intra-Industry Trade

Economic Growth and International Trade

International Factor Movements

The Instruments of Trade Policy

The Impact of Trade Policies

Arguments for Interventionist Trade Policies

Political Economy and Us Trade Policy

Economic Integration

International Trade and the Developing Countries

The Balance-Of-Payments Accounts

The Foreign Exchange Market

International Financial Markets and Instruments: an Introduction

Price Adjustments and Balance-Of-Payments Disequilibrium

National Income and the Current Account

Economic Policy in the Open Economy Under Fixed Exchange Rates

Economic Policy in the Open Economy Under Flexible Exchange Rates

Prices and Output in the Open Economy: Aggregate Supply and Demand

Fixed or Flexible Exchange Rates

The International Monetary System: Past, Present, and Future

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If M_s is the money supply, BR = reserves of commercial banks (depository institutions), C = currency held by the nonbank public, and a = the money multiplier, then

In the monetary approach to the exchange rate, a decrease in income in country I Will, other things equal, lead to an money in country I and therefore to of country I's currency against other currencies.

In the monetary approach to the balance of payments and the exchange rate, if there is an excess demand for money, the result is a balance-of-payments in a fixed exchange rate situation and of the country's currency in a flexible exchange Rate situation.

In the portfolio balance model, other things equal, the issuance of new bonds by a home corporation will the domestic interest rate and, especially if home and Foreign bonds are very good substitutes for each other, will lead to of the Home currency.

In the asset market or portfolio balance approach, other things equal, a depreciation of the home currency would be caused by in inflationary expectations in the home country and by in real income in the home country.

In the Dornbusch "overshooting" model, asset markets adjust rapidly to disturbances than do goods markets, and therefore the exchange rate and the price level proportionately to each other in the short run.

In considering the demand for money in the monetary approach to the balance of payments, it can be said that the money demand would increase if home real income and if the home interest rate .