Suppose that a country devalues the domestic currency.For a period of time the balance of trade deficit worsens before improving.This is an example of:
A) Absorption period
B) The J-Curve effect
C) Elasticity period
D) Full employment effect

Question

Quizplus · Accepted Answer

The J-curve effect suggests that, following a devaluation, the trade balance initially worsens before improving over a longer period of time. This occurs because, in the short run, exports and imports may be somewhat inelastic, meaning that a change in the exchange rate does not immediately change the quantity demanded or supplied of goods and services. However, over time, as firms and consumers adjust to the new prices, the trade balance is likely to improve. Therefore, option B is the most appropriate choice.

Suppose That a Country Devalues the Domestic Currency