Suppose in Dreamland import elasticity εM = 0.5 and export elasticity εX= 1.2. Currently, X =...

Suppose in Dreamland import elasticity ε_M = 0.5 and export elasticity ε_X= 1.2. Currently, X = 400 & M = 500.
1. To restore trade balance is devaluation effective? Explain!
2. To restore the trade balance, government of Dreamland devaluated its currency by 5%. What would be the new trade balance after devaluation?
3. How much devaluation is needed to restore the trade balance?

Expert Solution

Rahul Sunny answered 2 years ago

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