Devaluation Widens Current Account Surplus

Steps:

• Current account surplus means exports exceed imports in value.
• Government undervaluation devalues the currency, making exports cheaper and imports costlier.
• Marshall-Lerner condition holds, so export demand elasticity plus import elasticity >1, improving trade balance.
• Result: Current account surplus increases.

Why A is correct:

• Diagram A shows the current account balance shifting rightward or upward, indicating a larger surplus per the J-curve or standard devaluation effect under Marshall-Lerner.

Why the others are wrong:

• B: Depicts surplus shrinking, ignoring devaluation's positive impact.
• C: Shows no change, contradicting Marshall-Lerner improvement.
• D: Illustrates surplus turning to deficit, opposite of expected outcome.

Final answer: A