A depreciation will begin to improve the trade balance immediately if
A)imports and exports are responsive to the exchange rate changes.
B)imports and exports are inelastic to the exchange rate changes.
C)consumers exhibit brand loyalty and price inelasticity.
D)b and c

Question

Quizplus · Accepted Answer

If imports and exports are responsive to the exchange rate changes, a depreciation will make exports cheaper and imports more expensive, which will encourage domestic consumers to buy more domestic goods and encourage foreign consumers to buy more exports, leading to an improvement in the trade balance. In contrast, if imports and exports are inelastic, a depreciation may have little effect on the trade balance, and if consumers exhibit brand loyalty and price inelasticity, they may continue to buy imported goods regardless of the exchange rate, offsetting any improvement in the trade balance. Therefore, only A is the best choice.

A Depreciation Will Begin to Improve the Trade Balance Immediately