CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

Assume the Canadian demand elasticity for imports equals 0.2 while the foreign demand elasticity for Canadian exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. For Canada, the depreciation would lead to a(n) ______.
A. worsening trade balance - a larger deficit
B. improved trade balance - a smaller deficit
C. unchanged trade balance
Explanation: Both demands for imports and exports are inelastic.

User Contributed Comments 5

User Comment
Raph someone can give me more explanation? Please
saraguo21 since both imports and exports are inelastic, the change in price will not affect the volume demanded. since CAD depreciated, the $ value of exports decreased and the $ value of imports increased, which creates a larger deficit (exports -imports)
kseeba17 Although they are both inelastic, demand for exports goes up by 6% whilst the demand for imports goes down 4%. How does this not improve the BOP deficit?
gusmcewin When CAD depreciates, price of X remains the same in CAD but become cheaper in forex. Qty of X sold increases (by 0.3 x 20%) as X is now cheaper in forex terms - so Qty up and P constant leads to an increase in X revenue. The price of M in CAD increases by 20% and thus Qty of M decreases - but by only 20% x 0.2 (elasticity is low but still positive). So rev from X increases and exp on M decreases - therefore deficit decreases.
anaszul Marshall Lerner condition: If PEDx + PEDm > 1 then a devaluation will improve the current account
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