The J-curve adjustment path for trade balance adjustments assumes that ________ products are predominantly priced in the domestic currency and that ________ products are predominantly priced in the foreign currency
A) import; import
B) import; export
C) export; export
D) export; import

Question

Quizplus · Accepted Answer

The J-curve adjustment path assumes that export products are predominantly priced in the foreign currency, while import products are predominantly priced in the domestic currency. This is because a decline in the exchange rate makes export products cheaper in foreign markets, thus increasing demand and improving the trade balance in the long run. However, it takes time for this adjustment to occur, hence the J-shaped curve. On the other hand, a decline in the exchange rate makes import products more expensive, which may reduce demand only in the short run, hence the initial decline in the trade balance.

The J-Curve Adjustment Path for Trade Balance Adjustments Assumes That