Currency Devaluation Effects on Trade

Steps:

• Devaluation reduces the domestic currency's value relative to foreign currencies.
• Imported goods require more domestic currency to purchase, raising their prices.
• Exported goods become cheaper in foreign markets, increasing foreign demand.
• Higher demand for exports leads to increased export quantities.

Why D is correct:

• Devaluation lowers the exchange rate (E = domestic/foreign currency), increasing import prices (P_import * E rises) and boosting export quantities via improved competitiveness (Marshall-Lerner condition).

Why the others are wrong:

• A: Import prices increase, not decrease.
• B: Both import prices and export values rise, not decrease.
• C: Export quantities increase, not decrease.

Final answer: D