If the domestic currency is devalued and both export and import contracts are written in foreign currency,then the trade balance will:
A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question

Quizplus · Accepted Answer

When both export and import contracts are in foreign currency, the impact on the trade balance from a devaluation of the domestic currency depends on the price elasticity of demand for exports and imports. If demand is elastic, the trade balance might improve, but if it's inelastic, the balance could worsen or stay the same. Thus, without specific information on these elasticities, the outcome is uncertain.

If the Domestic Currency Is Devalued and Both Export and Import