Consider the case where supply curves are infinitely elastic

| November 24, 2016

Consider the case where supply curves are infinitely elastic. Suppose as well that n=n*=.6. Does the Marshall-Lerner condition hold? Why or why not? Suppose that the home country begins in a situation where imports equal $800 million while exports equal $400 million. If the trade elasticities shown above continue to hold, will a devaluation lead to an improvement in the home country’s current account balance? Why or why not? Derive and explain.

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