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JAMB Economics 1999 Question 47

Question 47

Balance of Payments and Exchange Rates

Devaluation helps in checking adverse balance of payments if the

  1. A.demand for imports is elastic
  2. B.demand for imports is inelastic
  3. C.supply of exports is elastic
  4. D.demand for exports is inelastic.
Show the answer and explanation

Answer: A (demand for imports is elastic)

Explanation

Devaluation makes imports dearer. If demand for imports is elastic, people cut imports a lot, so the import bill falls and the deficit improves.