The tendency for the trade balance to deteriorate in the short run following a depreciation of the exchange rate is known as:
A) exchange rate shock
B) J-curve
C) K-curve
D) commodity price shock
E) none of the above

Question

Quizplus · Accepted Answer

The J-curve effect refers to the initial deterioration in the trade balance that occurs after a depreciation of the exchange rate. This is due to the fact that it takes time for exports to increase and imports to decrease in response to the price changes resulting from the exchange rate depreciation. Over time, however, the trade balance is expected to improve as the volume of exports increases and imports decrease due to the more favorable exchange rate.

The Tendency for the Trade Balance to Deteriorate in the Short