Question
Countries running a large trade and current account deficit often rely on devaluing its currency to reduce the trade deficit and improve its balance of
Countries running a large trade and current account deficit often rely on devaluing its currency to reduce the trade deficit and improve its balance of payments position. Please mark the only INCORRECT answer regarding the effects of a devaluation
a. A large devaluation will only reduce the trade deficit if the sum of the elasticities of demand for imports and exports is larger than one ( X + M > 1 )
b. A 5% devaluation will always reduce the trade deficit
c. Even if the coutry devalues, in the short run, export and import volumes may not change that much and the trade balance may even worsen because of the so called J-curve effect
d. The lower the elasticities of exports and imports (meaning that the demand responds very little to changes in the price of exports and imports, i.e., they are inelastic), the lower will be the effect of a 10% devaluation on the trade deficit
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