prices indices.o between domestic and foreign interest rates,oud readily be allowed or, provided they are assumed fixed by economic conditions.In addition,it is assumed that the supply of money is instantausyadjusted to the demand for it.because the residents of the or through the international securities market.Which mechanism of adjustment of money supplyto moey demand prevails will determine the way in which moneary policy affects the the balance of payments,but that not pursued in the present analysis. The of these assumptions is that domestic monetary policy does not determine the domestic money supply but instead determines ony the division of the backing of the money supply the public demands,between international reserves and domestic credit.Monetary the um of mstic creditand not the mney supply:and verdomestic credit the balance of pyments and thus the behaviour of te country's interational reserves. The demand for money may be simply specified as Ma pf(y,i) where M is the nominal quantity of domestic money demanded.y is real output,i is the interest olding the foreign and therefore domestic pric level,andiicthe demand ore(by the standard homogeneity postulate of monetary theory.The supply of money is M.=R+D money supply.Since by assumption M,must be equal to M. R=M-D and 取=B()=0最8知 where Bithe curent ovenll baance of pyments.Letinthe imitial intemation reserve ratio,and substitutingfor =(g+%8,+，)-，8 Simplifying by world prices and interest rates. 8=%,-1' that is reserve growth and the balance of payments are positively relatedto domesticm 23