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Instructor’s Manual
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
1. Currency devaluation affects a country's trade balance via its impact on relative prices (elasticities
approach), spending behavior (absorption approach), and the purchasing power of money balances
2. See Question 1.
Instructor’s Manual
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
3. The Marshall-Lerner condition refers to the elasticities approach to devaluation. It suggests that
devaluation works best at improving a country's trade balance when demand elasticities are high (i.e.,
4. The J-curve effect implies that due to time lags between the response of goods traded to relative price
changes (e.g., recognition lags), currency devaluation will have a more pronounced effect on a
5. The extent to which changing currency values lead to changes in import and export prices is known as
the pass-through relationship. Pass-through is important since buyers have incentives to alter their
6. The absorption approach concludes that currency devaluation best improves the trade balance when
7. The monetary approach suggests currency depreciation affects the domestic price level and the
purchasing power of households. This may lead to changes in domestic expenditures and the level of
8. The 50 percent dollar appreciation results in a 50 percent increase in the firm's production cost in
terms of the peso.
9. The 50 percent dollar appreciation results in a less-than 50 percent increase in the firm's production
10. a. Export quantity 1000
Export price $3000
Export receipts $3 million
Import quantity 150
than 1.0, the U.S. trade balance will worsen.
