Which of the following statements is correct about the absorption approach?
I.If a country is operating below its full-employment level,it cannot improve trade balance by a currency devaluation.
II.If a country is operating at its full-employment level,the only way to improve trade balance is by reducing the domestic absorption.
A) Only I is correct.
B) Only II is correct.
C) Both I and II are correct.
D) Neither I nor II is correct.

Question

Quizplus · Accepted Answer

The absorption approach suggests that to improve the trade balance, a country must reduce its domestic absorption (consumption, investment, and government spending) if it is operating at full employment. This is because at full employment, increasing output to improve trade balance is not feasible, thus making reduction in domestic absorption the viable strategy.

Which of the Following Statements Is Correct About the Absorption