Question

Suppose that 1. The Elasticty of Imports in the USA in the short Run is 0.5 2. The Elasticity of Imports in Japan in the short Run is 0.3 3. The Elasticity of Imparts in the USA in the long Run is 0.8 According to the Elasticities approach to the Current Account Balance, if the Exchange Rate goes from Yen-51/100 to Yen-s1/50 O The Current Account Balance in the US will deteriorate in the short run and in the long run O The Current Account Balance in the US will deteriorate in the short run, and improve in the long run as long as the elasticity of imports in Japan is strictly more than 0.2 O The Current Account Balance in the US will improve in the short run and in the long run O The Current Account Balance in the US will deteriorate in the short run, and improve in the lang run

Answer 1

The US dollar has depreciated against Japan Yen. The elasticity approach of current account balance imply that a depreciation can help the current account balance only if the sum of elasticity of export and elasticity of import is greater than 1. Here elasticity of export of US + elasticity of iMport of Japan in short run is less than 1. This imply that IS current balance will deteriorate in the short run. While in the long run, as long as the the sum of elasticity of export and import is greater than 1, which happens when the elasticity of import fir Japan is greater than 0.2given the eladticity if export in ling run in USA us 0.8, the current account balance or trade balance will improve.  

This the correct option is b