The Marshall-Lerner condition suggests that depreciation of the franc leads to a worsening of France's trade account if the:
A) Elasticity of demand for French exports is 0.4 while the French elasticity of demand for imports is 0.2
B) Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.4
C) Elasticity of demand for French exports is 0.5 while the French elasticity of demand for imports is 0.7
D) Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.7

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a currency depreciation will worsen the trade balance if the sum of the absolute values of the price elasticities of demand for exports and imports is less than one. In option A, the sum is 0.4 + 0.2 = 0.6, which is less than one.

The Marshall-Lerner Condition Suggests That Depreciation of the Franc Leads