Assume that U.S.imports and exports both have inelastic supply.If the dollar is devalued,then the balance of trade will:
A) Become more negative
B) Become more positive
C) Stay the same
D) Not possible to answer

Question

Quizplus · Accepted Answer

When the dollar is devalued, U.S. exports become cheaper for foreign buyers, and U.S. imports become more expensive for domestic consumers. Given that both imports and exports have inelastic supply, the quantity changes will be relatively small compared to the price changes. However, the value of exports will increase (because they are cheaper and thus more will be bought even if the supply is inelastic), and the value of imports will decrease (because they are more expensive and thus less will be bought even if the supply is inelastic). This leads to an improvement in the balance of trade, making it more positive.

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