Assume the Canadian demand elasticity for imports equals 0.2,while the foreign demand elasticity for Canadian exports equals 0.3.Responding to a trade deficit,suppose the Canadian dollar depreciates by 20 percent.For Canada,the depreciation would lead to a:
A) Worsening trade balance--a larger deficit
B) Improving trade balance--a smaller deficit
C) Unchanged trade balance
D) None of the above

Question

Quizplus · Accepted Answer

The sum of the import and export elasticities (0.2 + 0.3 = 0.5) is less than 1, indicating that the Marshall-Lerner condition is not satisfied. Therefore, the depreciation of the Canadian dollar would worsen the trade balance, leading to a larger deficit.

Assume the Canadian Demand Elasticity for Imports Equals 0