Answer to Question #254307 in Macroeconomics for aaa

Question

An increase in money supply leads to a balance of payments deficit regardless of the degree of capital mobility". Explain whether this is true or false.

Answer 1

Solution:

The statement is true.

 

When there is too much money in the economy, people will spend more money, and demand increases at a rapid rate than supply can match. As a result, prices rise too quickly due to a shortage of commodities and inflation arises causing a continuous deficit. Furthermore, a rise in consumer spending will result in more import purchases thus exceeding the level of exports which increases the balance of payment deficit.