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 an abundance of money in the economy, people will spend more money, and demand will rise faster than supply can keep up. As a result of the scarcity of commodities, prices rise too quickly, and inflation occurs, resulting in a continuous balance of payment deficit. Furthermore, an increase in consumer spending leads to more import purchases, which exceeds the level of exports, increasing the balance of payment deficit.