Drastic fluctuations in exchange rates are possible in the plausible situation of very ________ short-run elasticities of demand for imports and exports,in which a nation's supply curve of its currency to the foreign exchange market can temporarily be ________.

Question

Quizplus · Accepted Answer

In the short run, if the elasticities of demand for imports and exports are low, then a change in the exchange rate will have a relatively small effect on the quantity of imports and exports. This means that the supply curve of a nation's currency to the foreign exchange market will be relatively inelastic, or downward-sloping.

Drastic Fluctuations in Exchange Rates Are Possible in the Plausible