Which approach predicts that if an economy operates at full employment and faces a trade deficit,currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut,thus freeing resources to produce exports?
A) The absorption approach
B) The Marshall-Lerner approach
C) The monetary approach
D) The elasticities approach

Question

Quizplus · Accepted Answer

The absorption approach suggests that for a currency devaluation to improve the trade balance, domestic absorption (spending) must decrease to free up resources for export production.

Which Approach Predicts That If an Economy Operates at Full