The J Curve Effect Means That Import Prices Are Higher

question 27

Multiple Choice

The J curve effect means that import prices are higher, thus revenues paid out increase while export prices are lower and incoming revenues decrease. Therefore, after a currency depreciation:

• A) the trade balance will improve, then decline, then improve, and then decline, appearing to be a series of J shapes.
• B) the trade balance will increase, then decrease, then jump higher, which economists call the J curve effect.
• C) the nation will cut back on imports immediately causing the trade balance to improve, which gives the curve an inverted J shape.
• D) the trade balance decreases and then increases over time giving the curve a J shape.

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