The J-curve effect states that
A)appreciation of a currency always worsens the trade balance unless it is accompanied by an expenditure-reducing policy
B)depreciation of a currency immediately improves the trade balance
C)depreciation of a currency may initially worsen the trade balance but will ultimately improve it
D)in the short run the physical volume of trade is affected by a currency depreciation, but in the long run the change in trade is offset by the change in relative prices
E)large exchange rate changes may lead to changes in trade patterns that persist even after exchange rates return to their initial level

Question

Quizplus · Accepted Answer

The J-curve effect states that depreciation of a currency may initially worsen the trade balance due to the higher cost of imports, but ultimately leads to an improvement in the trade balance as exports become cheaper and more competitive in the long run. The effect is called the J-curve because, in a graph, the trade balance initially worsens and then forms a "J" shape over time.

The J-Curve Effect States That