Appreciation Worsens Current Account Most with High Trade Elasticities

Steps:

• Appreciation raises export prices abroad and lowers import prices domestically, reducing export volume and increasing import volume.
• The magnitude of volume changes depends on price elasticities: higher elasticity amplifies quantity responses.
• Current account worsens by net effect of export decline minus import rise; largest worsening occurs with highest elasticities.
• Compare sums: A (1.0), C (1.0), D (1.2); D yields biggest imbalance per Marshall-Lerner framework.

Why D is correct:

• Both elasticities at 0.6 (sum >1) maximize quantity shifts, causing largest trade deficit per Marshall-Lerner condition for currency appreciation.

Why the others are wrong:

• A: Lower import elasticity (0.4) limits import surge, reducing overall worsening.
• C: Lower export elasticity (0.4) dampens export drop, muting deficit growth.
• B: Not enough information (option incomplete).

Final answer: D