The J-curve effect that results from 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.

Question

Quizplus · Accepted Answer

The J-curve effect refers to the initial decrease in the current account balance following a currency depreciation, followed by a gradual increase over time. This phenomenon occurs because in the short run, the value of imports increases more than the value of exports due to contracts and fixed prices. However, over time, the increase in exports and decrease in imports can lead to a recovery in the current account balance. Therefore, option B is the correct answer as it describes the reason for the initial decrease in the current account balance. Option A is incorrect as it refers to the eventual increase in the current account balance, not the J-curve effect. Option C is incorrect as changes in exchange rates can affect export and import demand. Option D is incorrect as it describes the effect of an increase in the dollar price of imports, not a depreciation of the exchange rate.

The J-Curve Effect That Results from Currency Depreciation Results Is