According to economic theory, under which condition does a depreciation of the domestic currency result in the smallest improvement in the country’s trade balance?

Show Answers

Both domestic demand for imports and foreign demand for exports are inelasticDomestic demand for imports is elastic while foreign demand for exports remains inelasticDomestic demand for imports is inelastic whereas foreign demand for exports is elasticBoth domestic demand for imports and foreign demand for exports are elasticNone of the above

Explanation

A depreciation of the domestic currency tends to improve the trade balance the least when both the home country’s demand for imports and the foreign countries’ demand for exports are inelastic. In this scenario, quantity demanded does not respond significantly to price changes, limiting the positive effect on the trade balance.