15.3: Managing Exchange Rates Flashcards
1
Q
The elasticities approach, highlights changes in …
The second approach, called the absorption approach, focuses on …
A
The composition of spending.
The impact of exchange rates on aggregate expenditure/saving decisions.
2
Q
The condition that guarantees that devaluations improve the trade balance is called …
A
The Marshall–Lerner condition.
3
Q
The generalized Marshall–Lerner condition formula:
A
ωXεX + ωM(εM – 1) > 0
Where:
* ωX and ωM are the shares of exports and imports, respectively, in total trade (i.e., imports + exports)
* εX and εM are the price elasticities of foreign demand for domestic country exports and domestic country demand for imports, respectively.
* Note that (ωX + ωM) = 1 and that an initial trade deficit implies ωM > ωX.
