6.3 - Signposting

Question 1

Depreciation/Devaluation Pros

Answer 1

1. Improved Trade Balance
2. Increased Growth and Redued Unemployment

Question 2

Depreciation/Devaluation Cons

Answer 2

• Inflation (Demand-Pull and Cost-Push)

Question 3

Exchange Rate Depreciation Evaluation (Opposite For Appreciation)

Answer 3

1. Depends on whether the Marshall-Lerner condition is satisfied; namely if the PEDX + PEDm > 1.
2. Depends on the severity of the restrictions of trade by foreign governments.
3. Depends on the size of the depreciation.
4. Furthermore, whether a weak exchange rate will rectify a current account deficit depends on income and thus demand overseas.
5. Furthermore, whether a weak exchange rate will rectify a current account deficit depends on income and thus demand at home.
6. Depends on the initial level of economic activity.