A domestic currency devaluation could lead to an immediate negative effect on the trade balance,if the domestic:
A) import and export contracts are written in dollar.
B) import and export contracts are written in foreign currency.
C) import contracts are written in domestic currency and the domestic export contracts are written in foreign currency.
D) import contracts are written in foreign currency and the domestic export contracts are written in domestic currency.

Question

Quizplus · Accepted Answer

When a domestic currency devalues, the cost of imports (if contracts are in foreign currency) increases immediately, leading to a higher trade deficit. Meanwhile, if export contracts are in domestic currency, the immediate effect on export revenue may not be positive, as prices in foreign markets do not change instantly. This combination exacerbates the trade balance negatively in the short term.

A Domestic Currency Devaluation Could Lead to an Immediate Negative