IMF Chapter 3

Question 1

What is the marshall lerner theorem?

Answer 1

dCA/dS = X/S (n_x + n_m - 1)

Question 2

What are the effect a depreciation on p_x, x, p_m and m?

Answer 2

p_x = 0
x = n_x (price elasticity of export demand)
p_m = 1
m = -n_m (price elasticity of import demand

Question 3

What is the Marshall-Lerner Condition?

Answer 3

dCA/dS > 0 only if n_x + n_m > 1

Question 4

What are the short run and long run effects on dCA/dS?

Answer 4

Short run: Negative (depreciation only have price effect)
Long-run: Positive (volume change over time)

Question 5

What is the important assumption in the Marshall Lerner formula?

Answer 5

That in the beginning there is a CA balance

Question 6

Explain the J-curve

Answer 6

The J-curve shows the short and long term effect of a depreciation on the CA

Question 7

What is the Short-run effect of the J-curve?

Answer 7

It is the price effect, since immediately after the depreciation, foreign goods become more expensive, so M > X.

Question 8

What is the Long-Run effect of the J-curve?

Answer 8

In the long run the volume effect takes over and there will be less imports and more exports improving the CA