Question

Suppose there is a real depreciation. This real depreciation is more likely to cause an increase in net exports when:

A. domestic output is relatively low.

B. foreign output is relatively high.

C. the Marshall-Lerner condition does not hold.

D. imports are not at all sensitive to price changes.

E. exports are very sensitive to price changes.

Answer 1

Option E.

• Given that there is a real depreciation of a currency in terms of its purchasing power.
• This will likely cause an increase in net exports when exports are very sensitive to price changes.
• When currency devalues, the exports will become more competitive as a result of their Increased sensitiveness to price changes.