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    Question

    If the exchange rate of some economy depreciates

    vis−a−vis US $ and if the Marshal Lerner condition is satisfied, then the current account deficit of that economy is expected to
    A Increase Correct Answer Incorrect Answer
    B Decrease Correct Answer Incorrect Answer
    C Remain the same Correct Answer Incorrect Answer
    D Can’t say Correct Answer Incorrect Answer

    Solution

    Marshall−Lerner condition ensures that devaluation improves a country’s balance of trade position if the sum of the price elasticities of demand for exports and imports (in absolute value) is greater than 1. Assuming that this condition is being fulfilled, then depreciation in exchange rate will decrease the current account deficit.

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