The Marshall-Lerner condition illustrates
A) the price effects of a nation's currency depreciation on its trade deficit.
B) the income effects of a nation's currency appreciation on its trade deficit.
C) the effect of fixed exchange rate systems on the trade balance.
D) the change in money demand and money supply and its effect on a trade deficit.

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a depreciation (or appreciation) of a nation's currency will only improve its balance of trade if the absolute value of the price elasticity of demand for its exports and imports summed together is greater than one. This condition focuses on the price effects of a currency depreciation on a nation's trade deficit.

The Marshall-Lerner Condition Illustrates