19 A country with a trade deficit will most likely:
A have an offsetting capital account surplus.
B save enough to fund its investment spending.
C buy assets from foreigners to fund the imbalance.
The correct answer is A
Why will a country have an offsetting capital account surplus, when it suffers a trade deficit?
20 A large industrialized country has recently devalued its currency in an attempt
to correct a persistent trade deficit. Which of the following domestic industries
is most likely to benefit from the devaluation?
A Luxury cars.
B Branded prescription drugs.
C Restaurants and live entertainment venues.
The correct answer is A
SOLUTIONS saids ‘A devaluation of the domestic currency means domestic producers are cutting the price faced by their foreign customers. The impact on their unit sales and their revenue depends on the elasticity of demand. Expensive luxury goods exhibit high price elasticity.’
Although I know that luxury goods may have a high income elasticity, why do they also have a high price elasticity? And I feel luxury cars may be conspicuous goods, which are kinds of Veblen goods. Thus, it’s price elasticity may be negative.
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