Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a
A) trade surplus in the short run.
B) trade surplus in the long run.
C) trade deficit in the short run.
D) trade deficit in the long run.

Question

Quizplus · Accepted Answer

The J-curve effect suggests that following a depreciation of the domestic currency, there might initially be a worsening of the trade balance (or an increase in the trade deficit) in the short run. This is because prices of imports become more expensive immediately, while the volume of exports does not increase instantly due to contracts and adjustment lags. Over time, as exports become more competitive and import volumes adjust, the trade balance may improve.

Because of the J-Curve Effect and Partial Currency Pass-Through, a Depreciation