Given favorable elasticity conditions, other things equal a depreciation of the euro tends to result in
A) lower prices of imported products for Italy.
B) higher prices of imported products for Italy.
C) a larger trade deficit for Italy.
D) a smaller trade surplus for Italy.

Question

Quizplus · Accepted Answer

A depreciation of the euro will make imported products more expensive for Italy, as they will have to exchange more euros for the same amount of foreign currency. This will lead to higher prices for imported products, which will ultimately increase inflationary pressures in Italy.

Given Favorable Elasticity Conditions, Other Things Equal a Depreciation of the Euro