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Unformatted text preview: FA , equals the balance of payments (for a nonreserve currency country). By combining the preceding two equations, we can express the central banks foreign assets as FA = (1/) PL(R,Y) DA If we assume that is a constant, the balance of payments surplus is F A = (1/) PL(R,Y) D A This equation summarizes the monetary approach. The first term on its right-hand side reflects changes in nominal money demand: all else equal, an increase in money demand will bring about a balance of payments surplus and an accompanying increase in the money supply that maintains money market equilibrium. The second term in the balance of payments equation reflects supply factors in the money market: all else equal, an increase in domestic credit raises money supply relative to money demand. So the balance of payments must go into deficit to reduce the money supply and restore money market equilibrium....
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This note was uploaded on 01/08/2012 for the course ECON 3580 taught by Professor Jb during the Fall '11 term at York University.
- Fall '11