A currency depreciation will begin to improve the trade balance immediately
A)if the demand for imports and exports are inelastic.
B)if the demand for imports and exports are elastic.
C)if imports decrease and exports decrease.
D)none of the above

Question

Quizplus · Accepted Answer

If the demand for imports and exports are elastic, then the depreciation of the currency will result in a greater change in the quantity of exports and imports. This means that exports would increase significantly due to being cheaper for foreign buyers, while imports would decrease due to being relatively more expensive for domestic buyers. Thus, the trade balance would improve immediately. If the demand for both imports and exports were inelastic or if both decreased, there would be limited effects on the trade balance.

A Currency Depreciation Will Begin to Improve the Trade Balance