The "J-curve effect" shows
A)the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.
B)the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation.
C)the trade balance's lack of responsiveness to the exchanges rate changes.
D)none of the options

Question

Quizplus · Accepted Answer

The "J-curve effect" refers to the initial deterioration and eventual improvement of a country's trade balance following a currency depreciation. This is because in the short term, the price of imports will rise while the volume of exports remains constant, leading to a larger trade deficit. However, over time, the increased competitiveness of exports due to the cheaper currency will lead to an increase in export volume and an improvement in the trade balance.

The "J-Curve Effect" Shows