The Marshall-Lerner Condition (MLC) is required for a

Solution

Solution: · Currency Depreciation Effect: A currency depreciation makes exports cheaper for foreigners (increasing demand) and imports more expensive for domestic residents (decreasing demand). · Marshall-Lerner Condition (MLC): For the combined effect to lead to a net improvement in the trade balance, the quantity changes must be large enough to offset the negative value effect (the initial loss in value of a unit of domestic currency). This requires that the sum of the absolute values of the price elasticities of demand for exports and imports must be greater than one.