Question
Macroeconomics Question on Inflation and unemployment
The real exchange rate is given by e = EP/P*, where e is the price of domestic goods in terms of foreign goods, E is the price of domestic currency in terms of foreign currency, P is the domestic price level, P* is the foreign price level. If the Indian Rupee depreciates vis-à-vis the Japanese Yen, and the Marshall-Lerner condition holds, then
A
India's imports will increase.
B
India's trade balance will improve.
C
foreign demand for Indian goods will increase.
D
foreign demand for Indian goods will decrease.
Answer
India's trade balance will improve.
Explanation
Solution
The correct option is (B): India's trade balance will improve. and (C): foreign demand for Indian goods will increase.