If η_M= -.85 and η_X = -.62 ,then A)Foreign exchange market is unstable B)Marshall-Learner condition is not met C)Foreign exchange market is stable D)If the exchange rate deviates from the equilibrium value,market forces will not be able to bring it back to the equilibrium on its own

Question

Quizplus · Accepted Answer

The given values represent the elasticities of substitution between imports and domestic goods and between exports and domestic goods. Since both values are negative, it indicates that the goods are substitutes. A higher negative value of elasticity indicates a stronger substitutability, and values between -1 and 0 indicate an inelastic relationship. Here, both values are between -1 and 0, indicating an inelastic relationship between imports and exports with domestic goods. Therefore, the foreign exchange market is stable. None of the given options in the question suggest anything about the Marshall-Learner condition or instability. Thus, the correct choice is C - Foreign exchange market is stable.

If ηM = -

If η_M= -