Assume the Marshall- Lerner condition holds. Which of the following would occur as a result of a decrease in the real exchange rate?

Question

Quizplus · Accepted Answer

According to the Marshall-Lerner condition, a decrease in the real exchange rate will lead to an increase in net exports because the demand for domestically produced goods will increase and the demand for foreign goods will decrease. This increase in net exports will lead to an increase in domestic output (A), a decrease in the quantity of imports (B), and an improvement in the trade balance (C). Therefore, the correct answer is D - all of the above.

Assume the Marshall- Lerner Condition Holds