This paper analyses the transitory and long run effects of devaluation and tariffs, as well as the effects of alterations in the domestic money supply and the terms of trade, for a small country on fixed exchange rates. These issues are investigated in a self-contained dynamic optimization model of the sort popularized by Brock (1974, 1975). Familiar results in the trade literature are thereby explicated for the nonspecialist who is nonetheless familiar with Brock's work. There are some new results regarding the role played by income and substitution effects in determining the consequences of terms-of-trade shifts. This paper introduces a perfect foresight optimizing model of the monetary approach to the balance of payments for a small country on fixed exchange rates. The model is then used to analyse the effects on the balance of payments of devaluation, of a tariff, and of changes in the terms of trade. The effects of devaluation, tariffs, and changes in the terms of trade have been analysed previously within the framework of nonoptimizing models: Dornbusch (1973, 1980) and Anderson and Takayama (1977) have studied the effect of devaluation, Mussa (1974, 1976), Anderson and Takayama (1978, 1981) and Batra and Ramachandran (1980) have studied the effect of tariffs, and Rodriguez (1976), Batra and Ramachandran (1980), and Anderson and Takayama (1981) have studied the effect of changes in the terms of trade. Optimizing models in which real balances appear as an argument in the utility function are increasingly popular in international economics. The general approach was inspired by Sidrauski (1967) and Brock (1974, 1975). Recent contributions to the trade literature using this framework include Dornbusch and Mussa (1975), Calvo (1980, 1981), Liviatan (1981), and Obstfeld (1981 a, 1981 b, 1982). The purpose of this paper is to translate the conventional small country/fixed exchange rate model into this framework. The results are generally congruent with those in the nonoptimizing literature, which suggests that the money-in-the-utility-function approach works well here. Compared to the nonoptimizing literature, the real advance is that price adjustment and price expectations are endogenous and rational. Among the benefits are that one need not postulate the ad hoc price adjustment mechanism used by Anderson and Takayama, nor the backward-looking (and hence irrational) permanent income formulation used by Rodriguez.' Furthermore, there has been controversy over the balance of payments effects of a shift in the terms of trade. While the model's predictions on this issue are theoretically ambiguous, the model shows that the answer depends crucially on the magnitude of income effects. This clarifies the conditions required for a terms of trade shift to improve or worsen the balance of payments.