Question

A depreciation will begin to improve the trade balance immediately if

A) imports and exports are responsive to the exchange rate changes
B) consumers exhibit brand loyalty and price inelasticity.
C) imports and exports are inelastic to the exchange rate changes and consumers exhibit brand loyalty and price inelasticity
D) imports and exports are inelastic to the exchange rate changes.

Answer 1

A depreciation will begin to improve the trade balance immediately if imports and exports are responsive to the exchange rate changes and consumers exhibit brand loyalty and price inelasticity.

Step-by-step explanation:

A depreciation will begin to improve the trade balance immediately if imports and exports are responsive to the exchange rate changes, consumers exhibit brand loyalty and price inelasticity.

When the currency of a country depreciates, its exports become cheaper to other nations, making them more attractive. If imports and exports are responsive to the exchange rate changes, an immediate improvement in the trade balance can occur as exports increase due to the lowered prices and imports decrease.

Furthermore, if consumers exhibit brand loyalty and price inelasticity, they are less likely to switch to alternative products due to price changes resulting from the depreciation. This means that even with reduced prices, demand for imports may still remain relatively stable, leading to an improvement in the trade balance.