The J curve implies that a real depreciation will cause
A)the nominal exchange rate to appreciate in the short run and depreciate in the long run.
B)the nominal exchange rate to depreciate in the short run and appreciate in the long run.
C)net exports to fall in the short run and rise in the long run.
D)net exports to rise in the short run and fall in the long run.

Question

Quizplus · Accepted Answer

The J curve theory suggests that following a depreciation of a country's currency, there might be an initial deterioration in the trade balance (net exports fall), due to contracts and price adjustments taking time to adapt to the new exchange rates. However, over time, as prices adjust, the trade balance improves (net exports rise), illustrating a J-shaped curve when plotted over time.

The J Curve Implies That a Real Depreciation Will Cause