The ________________ explains why it may take up to two years for a currency depreciation to make significant reductions in a nation's trade deficit.
A)J-curve effect
B)pass-through
C)Marshall-Lerner condition
D)multiplier effect

Question

Quizplus · Accepted Answer

The J-curve effect explains why it may take up to two years for a currency depreciation to make significant reductions in a nation's trade deficit. When a currency depreciates, the price of exports becomes relatively cheaper while the price of imports becomes relatively more expensive. However, there is a time lag between the change in price and the change in quantity demanded. Initially, demand for imports may not change much, while demand for exports may remain relatively stable. This creates a trade deficit that may actually increase in the short run before decreasing in the long run, as the volume of exports eventually increases and the volume of imports eventually decreases. This pattern resembles a "J" shape when graphed, hence the name J-curve effect.

The ________________ Explains Why It May Take Up to Two