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Effect of a currency devaluation: Identify the most likely trade impact. Full question: Devaluation of a country's currency leads to which of the following outcomes for exports and imports? Choose the correct option.

Difficulty: Easy

Exports become cheaper abroad; imports become costlier at home; trade balance tends to improve
Exports become costlier abroad; imports become cheaper; trade balance tends to worsen
No change in relative prices; only capital flows are affected
Both exports and imports become cheaper in domestic currency terms

Correct Answer: Exports become cheaper abroad; imports become costlier at home; trade balance tends to improve

Explanation:

Given data

Policy: Devaluation (a discrete reduction in the domestic currency's external value under a fixed/managed regime).

Concept / Approach
Devaluation lowers the foreign-currency price of domestic goods (boosts exports) and raises the domestic-currency price of foreign goods (restrains imports). If Marshall–Lerner condition holds, the trade balance improves.

Step-wise intuition
PX_foreign ↓ ⇒ X ↑; PM_domestic ↑ ⇒ M ↓ ⇒ (X − M) improves, ceteris paribus.

Final Answer
Exports cheaper, imports dearer, trade balance tends to improve.

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Effect of a currency devaluation: Identify the most likely trade impact. Full question: Devaluation of a country's currency leads to which of the following outcomes for exports and imports? Choose the correct option.

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