Exchange-Rate Adjustments

Apply the Marshall-Lerner condition of the elasticity approach to determine the impact of exchange-rate adjustments.
Determine if it makes any difference whether a nation’s currency depreciates when the economy is operating at less than full capacity versus full capacity. Explain your rationale.

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Exchange Rate Systems

Exchange Rate Adjustments

In order for the domestic currency depreciation to result in an escalation in foreign exchange earnings, there is need for the quantity impact of rising exports and falling imports combined to supersede the valuation effect of the rise in S. The Marshall-Lerner condition of the elasticity approach asserts that provided with an initial position of trade balance, devaluation could bring about improvements to the trade balance if the import and export elasticities of demand add up to more than unity (Piros & Pinto, 2013).

Assume that exports and imports were absolutely insensitive to variations………………

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