1.) Monetary approach says ' an event that causes a difference between the quantity of money demanded and the quantity of money supplied generates a change in the nation’s BOP or in the spot exchange value of its currency. This triggers an automatic adjustment process back toward equil. (Ms = Md)
2.) Under a fixed e arrangement, monetary approach indicates that an increase in DC generates a BOP deficit, while a decrease in DC results in a BOP surplus.
3.) “, rise in the foreign price level or domestic real income results in a BOP suprlus. Likewise, a declines in either the P* or y results in a BOP deficit.
4.) “ Under a flexible e arrangement, an increase in domestic credit results in a depreciation of the domestic currency, while a decline in domestic credit results in an appreciation of the domestic currency.
5.) “ “, Increase in P* or y results in an appreciation of the domestic currency, and a decline in P* or y results in a depreciation of the domestic currency.
6.) Two country setting ' S is determined by the relative quantities of money supplied and the relative quantities of money demanded. (In general, if all other things are the same, a nation that increases its money stock causes its currency to depreciate. In contrast, a nation whose households demand a larger quantity of money experiences an appreciation of its currency.
The monetary approach is a method of analyzing international monetary transactions based upon the above stated principle. These effects are general, and occur only in the model environment. There are multiple effects that can occur indepedent of these events, but this approach focuses only on these effects. Therefore this approach is useful only in studying the effects of a few changes in the model.