According to the Marshall-Lerner approach,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--foreign export demand is inelastic
B) Home demand for imports is inelastic--foreign export demand is elastic
C) Home demand for imports is elastic--foreign export demand is inelastic
D) Home demand for imports is elastic--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 absolute values of the price elasticities of demand for imports and exports is greater than one. This is satisfied when both home demand for imports and foreign demand for exports are elastic.

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