A fall in the exchange rate (S) leads to:
A) an increase in the current account
B) a decrease in the current account
C) no change in the current account
D) an indeterminate effect on the current account, which will ultimately depend on the relative . elasticities of demand for imports and exports

Question

Quizplus · Accepted Answer

A fall in the exchange rate can lead to different outcomes for the current account depending on the price elasticity of demand for imports and exports. If the Marshall-Lerner condition is met (the sum of the price elasticities of demand for imports and exports is greater than one), a depreciation of the currency (fall in exchange rate) will improve the current account. However, if this condition is not met, the effect could be the opposite. Therefore, the effect is indeterminate and depends on the specific elasticities of demand.

A Fall in the Exchange Rate (S) Leads To