Assume that a country is experiencing a balance of trade deficit and then suffers a rapid depreciation of its currency. J-curve theory suggests that the trade balance will adjust in three distinct periods in the following order
A) quantity adjustment period; pass-through period; currency contract period.
B) pass-through period; currency contract period; quantity adjustment period.
C) currency contract period; pass-through period; quantity adjustment period.
D) pass-through period; quantity adjustment period; currency contract period.

Question

Quizplus · Accepted Answer

The J-curve theory suggests that after a currency depreciation, the trade balance initially worsens during the currency contract period, then stabilizes during the pass-through period, and finally improves during the quantity adjustment period.

Assume That a Country Is Experiencing a Balance of Trade