Immediate correction of trade imbalance

CFA Level II Economics
#1

Hi folks,

This is the background statement in the question:
“A trade surplus will tend to cause the currency of the country in surplus to appreciate, while a deficit will cause currency depreciation. Exchange rate changes will result in immediate adjustments in the prices of traded goods as well as in the demand for imports and exports. These changes will immediately correct the trade imbalance.”

Which of the following is the statement most likely failing to address?
A. initial gap between the country’s imports and exports.
B. effect of an initial trade deficit on a country’s exchange rates.
C. lag in the response of import and export demand to price changes.

The correct answer is C.

But why is (A) wrong? If the initial gap between the country’s imports and exports is too large, wouldn’t it take more time for the trade imbalance to be corrected, if at all? If so, the trade balance cannot be immediately corrected.

#2

I think the reason A is wrong is because the question is asking about the timing of the adjustment, not the size of the trade gap. Even if the gap is big, the point is how quickly import/export demand responds to price changes. I’ve been tripped up by questions like this too, but C makes more sense when you think about the lag in reaction to exchange rate changes.

#3

Thanks @Mucland , yes you have a point there.

I guess (A) is correct, but (C) is more correct.

Thanks!