Why is a depreciation or devaluation of the nation's currency unable to eliminate a trade balance deficit when the country's demand for imports and the foreign demand for the country's exports are both highly inelastic?
What will be an ideal response?
POSSIBLE RESPONSE: The trade balance is the difference between the money value of exports and the money value of imports. For each, money value is price times quantity. Depreciation lowers the foreign-currency price of exports, so export quantity tends to increase, and depreciation increases the domestic-currency price of imports, so import quantity tends to decline. If demands are highly inelastic, the quantity changes are very small. Consider measuring the trade balance in foreign currency values. With inelastic demand, the value of exports decreases. With inelastic demand, the value of imports decreases by a very small amount. Putting these together, the value of the trade balance deteriorates (becomes more negative) as long as the value of exports falls by more than the value of imports decreases.
You might also like to view...
What is the relationship between the slope of the aggregate expenditure curve and the expenditure multiplier?
What will be an ideal response?
M1 is defined as a measure of money including, in part,
A) checkable deposits and currency. B) time deposits and currency. C) currency and savings deposits. D) time deposits and money market fund deposits. E) the lines of credit on credit cards and currency.
Cigarette companies favored a ban on cigarette advertising
What will be an ideal response?
The demand for Healthy Bars, a health snack bar, is Qd = 10 - (2 × P) and Healthy Bars has a constant average cost of $3 per snack bar. If Healthy Bars wants to package their bars to create an all-or-nothing offer and puts the profit-maximizing number of bars into each package and charges the profit-maximizing price for the package, what is their profit?
A) $16 B) $12 C) $6 D) $4