The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.
A) Marshall-Lerner
B) J-curve
C) Absorption
D) Pass-through

Question

Quizplus · Accepted Answer

The J-curve effect suggests that following a currency depreciation, a country's trade balance worsens for a period before it improves. This is because initially, the prices of imported goods become more expensive, and it takes time for exports to respond to the new exchange rate by becoming more competitive. As a result, there is a temporary worsening of the trade balance before the longer-term benefits kick in. The Marshall-Lerner effect refers to the condition where the sum of the price elasticity of demand for a country's exports and imports is greater than one, meaning that a currency depreciation will lead to an improvement in the trade balance. Absorption refers to the use of income either for consumption or investment, and pass-through refers to the degree to which changes in exchange rates are reflected in the prices of imported goods.

The ____ Effect Suggests That Following a Currency Depreciation a Country's