Assume a Two-Country World Containing Country a (Whose Currency Is

Essay

Assume a two-country world containing country A (whose currency is the dollar) and country B (whose currency is the peso). In this context, and using relevant graphs, explain how a depreciation of the dollar against the peso (for example, a 10% depreciation) conceptually affects the quantity of A's exports to B and the quantity of A's imports from B. (You can use either dollars or pesos on the vertical axes of your graphs. Also, assume that "pass-through" is complete.) Then carefully explain why economists say that such a depreciation could actually worsen the trade balance (or current account balance) of country A and indicate the Marshall-Lerner condition. Finally, define the "J curve" and give a very brief explanation of why it has the shape that it does.