A country has a deficit in its balance of payments and the sum of elasticities of its exports and…
The deficit will further aggravate when the sum of export and import demand elasticities is less than one. The quantity response to devaluation is too weak to offset the…
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A country has a deficit in its balance of payments and the sum of elasticities of its exports and imports is less than one. If the country devalues its currency, what will be its impact on its BoP?
Answer and explanation
Correct answer C
The deficit will further aggravate when the sum of export and import demand elasticities is less than one. The quantity response to devaluation is too weak to offset the adverse price effect on the trade balance, so the Marshall-Lerner condition for improvement is not satisfied.
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West Bengal SET (WB SET)