According to the Marshall-Lerner condition, a currency depreciation will best lead to an improvement on the home country's trade balance when the
A) home demand for imports is inelastic and foreign export demand is inelastic.
B) home demand for imports is inelastic and foreign export demand is elastic.
C) home demand for imports is elastic and foreign export demand is inelastic.
D) home demand for imports is elastic and foreign export demand is elastic.

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a currency depreciation will improve the trade balance if the sum of the price elasticities of demand for exports and imports is greater than one. This means both the home demand for imports and foreign export demand should be elastic.

According to the Marshall-Lerner Condition, a Currency Depreciation Will Best