Exam 14: Exchange-Rate Adjustments and the Balance of Payments

The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.

American citizens planning a vacation abroad would welcome:

How do demand elasticities influence a country's trade position when exchange rates change?

According to the Marshall-Lerner condition,currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners.To protect themselves from decreases in foreign sales caused by the mark's appreciation,Swiss companies could shift production to countries whose currencies had depreciated against the mark.

Complete currency pass through suggests that if the dollar's exchange value depreciates by 10 percent,imports will become 10 percent more expensive to Americans while U.S.exports will become 10 percent cheaper to foreigners.

The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars.An appreciation of the dollar's exchange value:

Suppose the dollar appreciates 10 percent against the Swiss franc.According to the J-curve effect,the U.S.balance of trade will initially worsen,but then improve as time passes.

By decreasing the relative production costs of U.S.companies,a dollar appreciation tends to lower U.S.export prices in foreign-currency terms,which induces an increase in the amount of U.S.goods exported abroad.

According to the Marshall-Lerner condition,a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:

The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:

According to the J-curve effect,an appreciation of the yens exchange value has:

Assume the Canadian demand elasticity for imports equals 0.2,while the foreign demand elasticity for Canadian exports equals 0.3.Responding to a trade deficit,suppose the Canadian dollar depreciates by 20 percent.For Canada,the depreciation would lead to a:

Empirical research suggests that most countries' price elasticities of demand for imports and exports are very inelastic,suggesting that currency depreciation would result in a worsening of a country's balance of trade.

The purpose of currency revaluation is to cause an appreciation in a currency's exchange value.

In the early 1990s,the yen sharply appreciated against the dollar.To protect themselves from export reductions caused by the yen's appreciation,Japanese auto companies transferred increasing amounts of auto production from the United States to Japan.

The J-curve effect implies that following a currency appreciation,a country's trade balance:

Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:

If a currency's exchange rate is overvalued,a government would likely initiate actions to revalue the currency.