Question

The "J-curve" effect describes?

1) the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross domestic product.
2) the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.
3) the tendency for exporters to initially reduce the price of goods when their own currency appreciates.
4) the tendency of a country's currency to initially depreciate after the country's inflation rate declines.

Answer 1

The J-curve effect describes the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.

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 means that despite a depreciation in currency value, the country's trade deficit worsens. The J-curve effect is commonly observed in international trade when a country experiences a lag in the improvement of its current account balance following currency depreciation.