According to the Marshall-Lerner condition,a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:
A) Home demand for imports is inelastic and foreign export demand is inelastic
B) Home demand for imports is elastic and foreign export demand is inelastic
C) Home demand for imports is inelastic and foreign export demand is elastic
D) Home demand for imports is elastic and foreign export demand is elastic

Question

Quizplus · Accepted Answer

The Marshall-Lerner condition states that a currency depreciation will improve the trade balance if the sum of the absolute values of the price elasticities of demand for imports and exports is greater than one. If both demands are inelastic, the condition is not met, and the trade balance is unlikely to improve.

According to the Marshall-Lerner Condition,a Currency Depreciation Is Least Likely