Empirical evidence regarding in the effects of currency depreciation on the balance of trade indicates that?
Correct answer: C. no strong generalization is possible
- A. depreciation generally improves the trade balance
- B. depreciation generally hurts the trade balance
- C. no strong generalization is possible
- D. depreciation has no effect on the trade balance
Explanation
The effect of depreciation depends on elasticities, import content and the timing of contracts, so it cannot be assigned one universal outcome. It may improve the trade balance under suitable conditions, or initially worsen it in a J-curve pattern.
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