The following statement is supported by what concept? "Allowing the devaluation of currency will improve balance of trade if we allow domestic spending by households,businesses,and government or total GDP to adjust appropriately."
A) Absorption theory
B) Elasticities theory
C) J-Curve effect
D) Disequilibrium approach

Question

Quizplus · Accepted Answer

The Absorption Theory suggests that a devaluation of a country's currency can lead to an improvement in its balance of trade if the economy adjusts in a way that domestic spending (by households, businesses, and the government) or total GDP decreases relative to the devaluation. This theory focuses on the relationship between national output (GDP) and the absorption of that output by domestic spending, indicating that for devaluation to improve the trade balance, domestic absorption must grow less rapidly than GDP.

The Following Statement Is Supported by What Concept? "Allowing the Devaluation