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In the standard Keynesian framework in Open Economy Macroeconomics, the supply is assumed to be perfectly elastic and the condition required for stability of of equilibrium is the Marshall-Lerner condition. When we drop the assumption of perfectly elastic supply, the supply curve of imports becomes positively sloped and the condition for stability of equilibrium is Bickerdicke-Robinson-Meztler condition. My problem is given the Positively sloped Supply of imports and negatively sloping demand for imports (measuring foreign price on vertical axis and imports on horizontal axis), why as a result of rise in exchange rate, the amount of imports fall but not as much as it does when the supply is perfectly elastic. It is of course very clear from the graph but I needed the intuitive explanation.

Microeconomics, Economics

  • Category:- Microeconomics
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