The more elastic is a nation's demand and supply of foreign exchange the:
A) larger is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
B) smaller is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
C) less feasible is a flexible exchange rate system
D) less feasible is devaluation as a policy to correct a deficit in the nation's balance of payments

Question

Quizplus · Accepted Answer

The more elastic the demand and supply of foreign exchange, the more responsive they are to changes in exchange rates. Therefore, a smaller devaluation or depreciation would be required to correct a deficit, as there would be a greater change in demand and supply. Option A suggests the opposite, Option C is not related to the given statement, and Option D is not necessarily true as devaluation may still be used as a policy measure.

The More Elastic Is a Nation's Demand and Supply of Foreign