The J-curve effect explains that after a currency depreciates in value
A)price effects are stronger in the short run; volume effects are stronger in the long run
B)price effects are outweighed by volume effects in both the short and long runs
C)volume effects are outweighed by price effects in the long run but not in the short run
D)net exports do not suffer as the price and volume effects offset each other in the long run
E)net exports suffer in the long run as the price effects become zero

Question

Quizplus · Accepted Answer

The J-curve effect suggests that following a depreciation, a country's trade balance will initially worsen before improving. This is because price effects (the immediate increase in the cost of imports) dominate in the short run, while volume effects (increased competitiveness of exports and eventually reduced volume of imports due to higher prices) become more significant in the long run.

The J-Curve Effect Explains That After a Currency Depreciates in Value