Question

The Marshall-Lerner condition states that a currency

Q: Answer-The Marshall-Lerner condition states that a currency devaluation will improve the trade balance only...

Explanation If x m 1, the quantity effects of a devaluation higher export volume, lower import volume will outweigh the negative price effects, leading to an improved trade balance.

devaluation will improve the trade balance only if:

A The sum of the price elasticities of demand for exports and imports is greater than one.

B The foreign exchange reserves are higher than the total external debt.

C The marginal propensity to import is zero.

D The domestic inflation rate is lower than the world average.

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The Marshall-Lerner condition states that a currency

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