According to the J-curve effect, currency depreciation
A) decreases a trade deficit.
B) increases a trade deficit.
C) decreases a trade deficit before increasing a trade deficit.
D) increases a trade deficit before decreasing a trade deficit.

Question

Quizplus · Accepted Answer

The J-curve effect suggests that following a depreciation of a country's currency, the trade deficit will initially worsen (increase) because the prices of imports become more expensive faster than the volume of exports increases. Over time, as exports become cheaper for other countries, the volume of exports rises, leading to an improvement (decrease) in the trade deficit.

According to the J-Curve Effect, Currency Depreciation