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I. Suppose in Dreamland import elasticity εM = 0.5 and export elasticity εX = 1.2. Currently,...

I. Suppose in Dreamland import elasticity εM = 0.5 and export elasticity εX = 1.2. Currently, Export = 400 & Import = 500.

a. To restore trade balance is devaluation effective? Explain!

b. To restore the trade balance, government of Dreamland devaluated its currency by 5%. What would be the new trade balance after devaluation?

c. How much devaluation is needed to restore the trade balance?

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