Export and import contracts are denominated in domestic currency.
The domestic demand for imports is inelastic.
The foreign demand for domestic exports is inelastic.
What will happen to the domestic trade balance following a devaluation of the domestic currency?
Explain carefully the effects during the currency-contract period and the pass-through period, and be sure to explain why these effects occur.
Since the question is written in English, i find it appropriate to reply in English :)
Below is what i think:
The question has clearly stated that both the demand for imports and exports are inelastic, hence, i would like to look at it as the demand (in quantity) will not be affected by the fluctuation in the foreign exchange.
For illustration purpose, say the domestic currency is RMB while the foreign currency is USD, and the exchange rate is currently USDRMB 6.00 and after it is depreciated it would be USDRMB 6.50.
Assuming that the demand for exports is 50 units priced at RMB 100 per unit, while imports is 80 units, also priced at RMB100.
Since the contracts are all denominated in DOMESTIC currency, the balance of payment is not affected by the movement in the exchange and the Demand (quantity of goods) also is independent (inelastic) of price, we can hence conclude that:
1) the domestic trade balance (in RMB) will not be affected
2) the foreign country's trade balance will be affected because the contracts are not fixed in its currency (the impact however depends on whether the foreign country's exports > imports or another way round)