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Students Zone - Revision Questions

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Chapter 5

Question 1

"Excessive monetary growth leads to balance of payments problems under fixed exchange rates, and a currency problem under floating exchange rates." Discuss this statement with reference to the monetary approach to the balance of payments.

Question 2

Examine separately the effects of (i) a decrease in domestic income and (ii) a rise in the foreign price level under both fixed and flexible exchange rates within the context of the monetary approach to the balance of payments. Discuss the contribution and limitations of this model.

Question 3

a) What are the assumptions underlying the monetary approach to the balance of payments?

b) Discuss the effects of a devaluation in the context of the monetary model.

c) Using the monetary model discuss the effects of an increase in domestic income under both fixed and floating exchange rates.

Question 4

"A one off monetary expansion will lead to a transitory balance of payments deficit under fixed exchange rates but a permanent depreciation of the exchange rate under floating exchange rates." Discuss.