Concept:Devaluation corrects a balance of payments deficit only when foreign buyers respond to cheaper exports by buying more.
Explanation:Devaluation makes a country’s exports cheaper for foreign buyers.
The effect on export earnings depends on the price elasticity of demand for exports.
If demand is perfectly inelastic, the quantity demanded does not change when the price falls.
Foreign buyers continue to purchase exactly the same quantity as before.
Because the price per unit is now lower, total export revenue actually decreases.
Lower export revenue widens the trade deficit instead of correcting it.
Hence, devaluation fails to improve the balance of payments.
For devaluation to work, demand should be elastic, so that a fall in price leads to a proportionally larger rise in quantity demanded.
Among the given options, perfectly inelastic demand is the condition under which devaluation cannot correct the deficit.
Answer:A. perfectly inelastic