Assume that a country realizes unemployment and excess production capacity.According to the absorption approach,currency devaluation tends to decrease domestic output and worsen the balance of trade.

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According to the absorption approach, currency devaluation tends to increase output and improve the balance of trade. This is because a devaluation makes exports cheaper and imports more expensive, leading to an increase in exports and a decrease in imports. This in turn increases domestic output and reduces unemployment.

Assume That a Country Realizes Unemployment and Excess Production Capacity