SUGGESTED SOLUTIONS –

King’s College AMENDMENTS

Secondary 7A (2008-2009)
Economics
Assignment

Source: Supplementary Exercises on Balance of Payments Accounting and Adjustments and Exchange Rates
Date of submission: 05/01/2009 (Mon)

Remarks:
Red: Typo Blue: Correction

Exercise 2
3. If the demands for a country’s imports and exports are very inelastic, then a deprecation of her currency
does not necessarily improve the balance of payments position.
If the demand for imports is very inelastic, the fall in the quantity of goods imported is proportionately
less than the rise in import prices (in terms of domestic currency), the import value (in terms of domestic
currency) may increase greatly after depreciation. If the demand for her [imports] exports is very
inelastic, the increase in quantity of goods exported is proportionately less than the fall in export prices
(in terms of the foreign currency; export prices remain unchanged in terms of the domestic currency), the
export value may not increase much (in terms of the domestic currency) after depreciation.
According to the Marshall-Lerner conditions, these elasticities have to be greater than unity in order for
depreciation to improve a country’s trade deficit.
4. For a surplus country under a fixed exchange rate system:
- Foreign currency
 money supply
 price level
 exports 
- Foreign currency
 money supply
 demand for imports

- Foreign currency
 money supply
 interest rate [
]   net capital inflow 

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