What does the Marshall-Lerner condition describe? a. When the valuation effect from a real exchange rate change is larger than the volume effect, a real depreciation will not lead to an improvement in the current account. b. A real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate, ceteris paribus. c. If the price elasticities of import and export demand with respect to the real exchange rate adds up to be larger than 1, then a real exchange rate depreciation will lead to an improvement in current account balance. d. All of the above 2. We may observe a J-curve in the trade balance after a real exchange rate depreciation because a. exports will continue to sell for a time in the same quantity and at the same domestic price as before the real exchange rate depreciation, so total export earnings remain fixed in the immediate aftermath of the depreciation. b. Imports measured in domestic currency will go up in value right after the depreciation, holding import volume constant. c. export and import orders (and hence volumes) adjust to the new relative prices slowly, so the trade balance will only improve given time. d. All of the above. 3. We will see an immediate deterioration in the trade balance after a real exchange rate appreciation if which of the following holds? a. The UIP condition. b. Purchasing power parity. c. The J-curve effect. d. The Marshall-Lerner condition. 3. What happens to the current account balance of Saudi Arabia, whose main export is crude oil priced in U.S. dollars, when the Saudi currency riyal experiences nominal depreciation? a. Nominal depreciation translates to real depreciation, so current account balance will increase. b. Since Saudi exports mainly in dollarized commodity, there is very little “pass-through” so nominal depreciation does not translate to real depreciation and the nominal depreciation will have little effect on current account balance. c. Current account most likely will experience a J-Curve effect with initial declines and then improvement. d. None of the above. 4. What happens to the current account balance of the United States, who exports a large amount of natural gas priced in U.S. dollars, and imports a large amount of consumer electronics priced in foreign currencies, when the U.S. dollar experiences nominal depreciation? a. Nominal depreciation translates to real depreciation right away, so current account balance will increase. b. Current account most likely will experience a J-Curve effect with initial declines and then improvement. c. Current account balance will deteriorate initially assuming Marshall-Lerner condition holds for the U.S. d. None of the above. Refer to Table 1 below to answer the following questions. Please type out your answer. Table 1 Elasticity estimates for trade in manufactured goods for industrialized countries η (elasticity of export demand) η* (elasticity of import demand) Country On Impact Short-run Long-run On Impact Short-run Long-run Austria 0.39 0.71 1.37 0.03 0.36 0.80 Belgium 0.18 0.59 1.55 - - 0.70 Britain - - 0.31 0.60 0.75 0.75 Canada 0.08 0.40 0.71 0.72 0.72 0.72 Denmark 0.82 1.13 1.13 0.55 0.93 1.14 France 0.20 0.48 1.25 - 0.49 0.60 Germany - - 1.41 0.57 0.77 0.77 Italy - 0.56 0.64 0.94 0.94 0.94 Japan 0.59 1.01 1.61 0.16 0.72 0.97 Netherlands 0.24 0.49 0.89 0.71 1.22 1.22 Norway 0.40 0.74 1.49 - 0.01 0.71 Sweden 0.27 0.73 1.59 - - 0.94 Switzerland 0.28 0.42 0.73 0.25 0.25 0.25 U.S. 0.18 0.48 1.67 - 1.06 1.06 6. For the U.S., is the Marshall-Lerner condition satisfied in the short run? Justify your answer. 7. Is the Marshall-Lerner condition satisfied on impact for any of the countries listed above? What does that imply about the immediate effect of a real exchange rate depreciation on these countries’ trade balances? 8. In the long-run, is there any country where the Marshall-Lerner condition is still not satisfied? Explain why Marshall-Lerner condition tends to hold in the long run.
Please answer the following multiple choice questions related to the Marshall-Lerner condition, the J-Curve effect, and the Pass-Through effect. Just circle or highlight the correct answer.
- What does the Marshall-Lerner condition describe?
a. When the valuation effect from a real exchange rate change is larger than the volume effect, a real
b. A real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate, ceteris paribus.
c. If the
d. All of the above
2. We may observe a J-curve in the trade balance after a real exchange rate depreciation because
a. exports will continue to sell for a time in the same quantity and at the same domestic price as before the real exchange rate depreciation, so total export earnings remain fixed in the immediate aftermath of the depreciation.
b. Imports measured in domestic currency will go up in value right after the depreciation, holding import volume constant.
c. export and import orders (and hence volumes) adjust to the new relative prices slowly, so the trade balance will only improve given time.
d. All of the above.
3. We will see an immediate deterioration in the trade balance after a real exchange rate appreciation if which of the following holds?
a. The UIP condition.
b.
c. The J-curve effect.
d. The Marshall-Lerner condition.
3. What happens to the current account balance of Saudi Arabia, whose main export is crude oil priced in U.S. dollars, when the Saudi currency riyal experiences nominal depreciation?
a. Nominal depreciation translates to real depreciation, so current account balance will increase.
b. Since Saudi exports mainly in dollarized commodity, there is very little “pass-through” so nominal depreciation does not translate to real depreciation and the nominal depreciation will have little effect on current account balance.
c. Current account most likely will experience a J-Curve effect with initial declines and then improvement.
d. None of the above.
4. What happens to the current account balance of the United States, who exports a large amount of natural gas priced in U.S. dollars, and imports a large amount of consumer electronics priced in foreign currencies, when the U.S. dollar experiences nominal depreciation?
a. Nominal depreciation translates to real depreciation right away, so current account balance will increase.
b. Current account most likely will experience a J-Curve effect with initial declines and then improvement.
c. Current account balance will deteriorate initially assuming Marshall-Lerner condition holds for the U.S.
d. None of the above.
Refer to Table 1 below to answer the following questions. Please type out your answer.
|
Table 1 Elasticity estimates for trade in manufactured goods for industrialized countries |
||||||
|
η ( |
η* (elasticity of import demand) |
|||||
|
Country |
On Impact |
Short-run |
Long-run |
On Impact |
Short-run |
Long-run |
|
Austria |
0.39 |
0.71 |
1.37 |
0.03 |
0.36 |
0.80 |
|
Belgium |
0.18 |
0.59 |
1.55 |
- |
- |
0.70 |
|
Britain |
- |
- |
0.31 |
0.60 |
0.75 |
0.75 |
|
Canada |
0.08 |
0.40 |
0.71 |
0.72 |
0.72 |
0.72 |
|
Denmark |
0.82 |
1.13 |
1.13 |
0.55 |
0.93 |
1.14 |
|
France |
0.20 |
0.48 |
1.25 |
- |
0.49 |
0.60 |
|
Germany |
- |
- |
1.41 |
0.57 |
0.77 |
0.77 |
|
Italy |
- |
0.56 |
0.64 |
0.94 |
0.94 |
0.94 |
|
Japan |
0.59 |
1.01 |
1.61 |
0.16 |
0.72 |
0.97 |
|
Netherlands |
0.24 |
0.49 |
0.89 |
0.71 |
1.22 |
1.22 |
|
Norway |
0.40 |
0.74 |
1.49 |
- |
0.01 |
0.71 |
|
Sweden |
0.27 |
0.73 |
1.59 |
- |
- |
0.94 |
|
Switzerland |
0.28 |
0.42 |
0.73 |
0.25 |
0.25 |
0.25 |
|
U.S. |
0.18 |
0.48 |
1.67 |
- |
1.06 |
1.06 |
6. For the U.S., is the Marshall-Lerner condition satisfied in the short run? Justify your answer.
7. Is the Marshall-Lerner condition satisfied on impact for any of the countries listed above? What does that imply about the immediate effect of a real exchange rate depreciation on these countries’ trade balances?
8. In the long-run, is there any country where the Marshall-Lerner condition is still not satisfied? Explain why Marshall-Lerner condition tends to hold in the long run.
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