Page 160 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes (ii) Macroeconomic equilibrium in an open economy requires
(a) goods market equilibrium
(b) money market equilibrium
(c) balance of payments equilibrium
(d) all of the above
(e) only (a) and (b) above
(iii) An implication of the asset approach is that
(a) since financial asset prices change rapidly, exchange rate should vary more than goods
prices
(b) since PPP holds even in the short-run, goods prices should change as rapidly as the
exchange rate
(c) covered interest parity will rarely hold if there is perfect capital mobility
(d) goods prices will be largely unaffected by exchange rate changes in the long run
(iv) Suppose the U.S. fixes the price of gold at $2.00 per ounce, and Germany fixes the price of
gold at €4.00 per ounce. The $/€ exchange rate is
(a) 1:2 (b) 2:1
(c) 1:1 (d) 1:4
(v) The elasticity approach to the balance of trade
(a) focuses on the effects of changing relative prices of domestic and foreign goods on the
balance of trade
(b) is only applicable with a floating exchange rate system
(c) is based on an analysis of the absolute prices of a country's exports in world markets
(d) indicates that the demand elasticity for exports is always inelastic
(vi) The J-curve
(a) only occurs under fixed exchange rates
(b) occurs when a currency is appreciated
(c) shows the initial worsening of the balance of trade with a devaluation
(d) shows how the balance of trade immediately improves after a devaluation
(vii) The monetary approach to the balance of payments
(a) focuses on the importance of the current account balance
(b) views exchange rate variations as the sole adjustment mechanism
(c) highlights the role of financial assets of payments adjustment
(d) implies that the price level and exchange rate can both be determined by the central
bank
13.3 Summary

• The main aim of this paper was to determine the dynamics of balance of payments adjustment
in the countries of the West African Monetary Zone (WAMZ). Specifically, the study seeks to
examine the MABP theory and its implication for the WAMZ countries. This entails estimating
a net foreign asset equation and testing if the estimated partial coefficient of changes in domestic
credit with respect to net foreign asset is not significantly different from minus one. If the
condition is satisfied, the inference is that the money plays a role in the determination of balance
of payments deficits. The empirical results confirm that money has played a significant role in
the determination of deficits in the balance of payments. Thus, the findings from both the within-
country and cross-country effects suggest that the monetary approach to the WAMZ countries
balance of payments is indeed applicable. Specifically, the findings indicate that both interest

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