The J-curve effect of a currency depreciation results is due to
A)the initial effect having positive effects on the current account balance.
B)the value of imports increasing by more than the value of exports at the time of devaluation.
C)exports and imports being totally unresponsive to changes in exchange rates.
D)decreases in the dollar price of imports.
E)None of the above.

Question

Quizplus · Accepted Answer

The J-curve effect of a currency depreciation refers to a pattern of trade flows following a devaluation. In the short run, the value of imports increases by more than the value of exports because the prices of imports remain the same while exports increase in price due to the depreciation of the currency. This leads to a temporary deterioration in the current account balance before it improves in the long run due to increased export competitiveness.

The J-Curve Effect of a Currency Depreciation Results Is Due