Assume that a country operates at less than full employment and has excess productive capacity.According to the absorption approach,the currency devaluation (depreciation) tends to
A) expand domestic output and improve the balance of trade
B) expand domestic output and worsen the balance of trade
C) contract domestic output and improve the balance of trade
D) contract domestic output and worsen the balance of trade

Question

Quizplus · Accepted Answer

During a situation of less than full employment and excess productive capacity, a currency devaluation tends to lead to an expansion of domestic output as exports become cheaper and more competitive in the international market. This increase in output also improves the balance of trade as exports increase and imports become relatively more expensive. Therefore, choice A is the correct option.

Assume That a Country Operates at Less Than Full Employment