For this question,assume that the Marshall-Lerner condition does not hold.A reduction in the real exchange rate will tend to cause which of the following to occur?

Question

Quizplus · Accepted Answer

When the Marshall-Lerner condition does not hold, a reduction in the real exchange rate does not necessarily lead to predictable changes in net exports (NX) or domestic/foreign output (Y/Y*). The Marshall-Lerner condition states that a devaluation (or depreciation) of a country's currency will only lead to an improvement in the trade balance if the sum of the price elasticities of demand for imports and exports is greater than one. If this condition does not hold, the effects of changes in the real exchange rate on NX and output can be ambiguous, making none of the provided options universally correct.

For This Question,assume That the Marshall-Lerner Condition Does Not Hold