The Marshall-Lerner condition holds that a country's current account balance will ________ in response to a real ________ in a nation's currency if the________.
A) improve; depreciation; sum of the price elasticities of export and import demand exceeds 1
B) worsen; depreciation; sum of the price elasticities of export and import demand exceeds 1
C) improve; appreciation; sum of the price elasticities of export and import demand exceeds 1
D) improve; appreciation; sum of the price elasticities of export and import demand exceeds 0
E) worsen; depreciation; sum of the price elasticities of export and import demand exceeds 0

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition posits that a country's current account balance will improve following a real depreciation of its currency if the combined price elasticities of demand for exports and imports exceed 1. This is because a depreciation makes exports cheaper and imports more expensive, potentially increasing export volumes and decreasing import volumes, improving the current account balance if demand is sufficiently elastic.

The Marshall-Lerner Condition Holds That a Country's Current Account Balance