The "J curve" effect describes:
A) the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross national product.
B) the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.
C) the tendency for exporters to initially reduce the price of goods when their own currency appreciates.
D) the reaction of a country's currency to initially depreciate after the country's inflation rate declines.

Question

Quizplus · Accepted Answer

The "J curve" effect describes the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating. This is because it takes time for the country's exports to become more competitive and for importers to adjust their buying habits in response to the lower currency value. As a result, in the short run, the cost of imports may rise while the benefits of increased exports have not yet been realized. The name "J curve" comes from the shape of a graph that shows a period of worsening current account balances before improving.

The "J Curve" Effect Describes