When a depreciation in the nation's real effective exchange rate initially lowers the trade balance and then increases it, economists refer to the phenomenon as:
A) the K curve effect.
B) the J curve effect.
C) the real balances effect.
D) the marginal propensity to import.

Question

Quizplus · Accepted Answer

The J curve effect refers to the phenomenon where a depreciation in the real effective exchange rate initially leads to a worsened trade balance (as imports become more expensive and exports take time to adjust), but eventually leads to an improved trade balance (as exports become more competitive and imports become more expensive). This phenomenon is named after the J-shaped curve that can depict the trade balance over time.

When a Depreciation in the Nation's Real Effective Exchange Rate