The shape of the curve that shows the effect of currency depreciation upon a country's current account balance over time, with the curve itself being known as the __________, reflects the fact that short-run demand elasticities are sufficiently __________ than long- Run elasticities to generate this particular shape. (Ignore the negative sign on the Elasticities.)

Question

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The J curve is characterized by a short-term increase in the current account deficit after a currency depreciation, followed by a long-term improvement in the current account due to increased exports and decreased imports. This shape is due to short-term demand being relatively inelastic, while long-term demand becomes more elastic as consumers and producers adjust to the new prices. Thus, the short-run demand elasticities are lower than the long-run elasticities, leading to a J-shaped curve.

The Shape of the Curve That Shows the Effect of Currency