Economic theory predicts that a currency depreciation will least lead to an improvement in the home country's trade balance when ?
Correct answer: A. home demand for imports is inelastic and foreign export demand is inelastic
- A. home demand for imports is inelastic and foreign export demand is inelastic
- B. home demand for imports is elastic and foreign export demand is inelastic
- C. home demand for imports is inelastic and foreign export demand is elastic
- D. home demand for imports is elastic and foreign export demand is elastic
Explanation
A depreciation improves the trade balance when the combined price elasticities of import demand and foreign demand for exports satisfy the Marshall-Lerner condition. Improvement is least likely when both demands are inelastic.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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