Sometimes a change in the real effective multilateral exchange rate has the opposite result from what one would expect. One explanation may be:
a. that buying habits are very strong and firms and consumers continue their behavior despite large changes in prices of imports.
b. that price changes do not bring about immediate responses in import or export volume because of contracts, or firms' difficulty in changing suppliers quickly.
c. that the theory is fundamentally flawed and does not predict well.
d. that there are other factors we are not considering that affect the trade balance.
Ans: b. that price changes do not bring about immediate responses in import or export volume because of contracts, or firms' difficulty in changing suppliers quickly.
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