Multiple choice

A country is advised to devalue its currency only when its exports face

  1. unit elasticity of demand

  2. inelastic demand in foreign markets

  3. elastic demand in foreign markets

  4. perfectly inelastic demand
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Devaluation improves trade balance only when export demand is elastic (Marshall-Lerner condition). If demand is inelastic, devaluation may worsen the trade balance by increasing import costs without sufficiently increasing export volumes.

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