The elasticity, absorption, and monetary approaches are about how:

Question

BlackTom AI · Accepted Answer

Trade imbalances are impacted by weakening or strengthening of a currency.

Relevant concepts:
- Elasticity approach (Marshall–Lerner): a currency depreciation affects export and import volumes through price elasticities of demand for exports (εx) and imports (εm). Depreciation improves the trade balance if the sum of absolute elasticities exceeds 1.
- Absorption approach: national income identity Y = C + I + G + (X − M). Trade balance (X − M) = Y − A, where A is domestic absorption (C + I + G). A depreciation can improve the trade balance if it reduces domestic absorption relative to output.
- Monetary approach: the balance of payments is determined by money supply/demand. Exchange rate changes affect domestic price level and real money balances; persistent monetary disequilibrium produces external surpluses/deficits.

Step-by-step reasoning and intermediate steps:
1. Elasticity approach: Let a depreciation of e% change relative prices. Approximate quantity responses:
   %ΔX ≈ εx * e
   %ΔM ≈ εm * e
   The value of exports and imports in domestic currency changes roughly with quantity changes (assuming small price pass-through). Change in trade balance depends on whether εx + εm > 1 (Marshall–Lerner). Example: if εx = 0.6 and εm = 0.6, sum = 1.2 > 1, so depreciation improves the trade balance.
2. Absorption approach: TB = Y − A. If depreciation lowers real absorption A (through reduced real incomes or tighter spending) more than it lowers or raises output Y, TB improves. Conversely, if absorption rises or falls less than output, TB can worsen.
3. Monetary approach: Depreciation may raise domestic prices (inflation), reducing real money balances. If the monetary authority doesn’t accommodate, lower real balances reduce spending and imports, improving the current account. In the long run, monetary adjustments determine external balance.

Why the correct answer is correct:
All three approaches analyze how exchange rate changes (weakening/strengthening of a currency) influence trade imbalances via price elasticities, spending/absorption effects, or monetary forces. They share the common focus on the effects of currency movements on the trade balance.

Why other options are incorrect:
- “Weakening or strengthening of a currency are impacted by trade imbalances” reverses causality; these approaches focus on how exchange rate changes affect trade, not primarily the reverse.
- “Trade balances are impacted by changes in trade policies” is true in general, but those three approaches specifically concern exchange-rate effects, not trade-policy mechanisms.
- “Changes in trade policies are impacted by weakening or strengthening of a currency” again misstates the focus.

Final confirmation: the correct answer is “trade imbalances are impacted by weakening or strengthening of a currency,” which matches the provided answer.

The elasticity, absorption, and monetary approaches are about how:单项选择题

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