CHAPTER 70 THE IMPACT OF CHANGES IN EXCHANGE RATES

Question 1

J curve effect

Answer 1

In the short term, a devaluation is likely to lead to a deterioration in the current account position before it starts to improve.

Question 2

Marshall-Lerner condition

Answer 2

Devaluation will lead to an improvement in the current account so long as the combined price elasticities of exports and imports are greater than 1.