In the monetary approach to the balance of payments, under flexible exchange rates, an Increase in the proportion of income that people in country A wish to hold as money Would, other things equal, lead to an __________ in country A's balance of payments and Therefore to __________ of A's currency in the foreign exchange markets.
A) incipient surplus; a depreciation
B) incipient surplus; an appreciation
C) incipient deficit; a depreciation
D) incipient deficit; an appreciation

Question

Quizplus · Accepted Answer

When people in country A wish to hold a larger proportion of their income as money, they reduce their spending on goods and services, including imports. This reduction in imports improves the balance of payments, leading to an incipient surplus. As demand for country A's currency increases to purchase its now relatively cheaper goods and services, the currency appreciates in the foreign exchange markets.

In the Monetary Approach to the Balance of Payments, Under