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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