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    Question

       Which of the following best explains why the J-curve effect occurs?

    A Prices of imports adjust immediately to currency depreciation Correct Answer Incorrect Answer
    B Export volumes react instantly to currency changes Correct Answer Incorrect Answer
    C Import and export contracts are fixed in the short term, causing delayed adjustments Correct Answer Incorrect Answer
    D Domestic production costs decrease immediately Correct Answer Incorrect Answer

    Solution

    The J-curve effect occurs because import and export contracts are fixed in the short-term causing delayed adjustments.   J Curve refers to a change in the country’s balance of trade , often following a currency devaluation or depreciation. A weak currency means that imports will be costly, while it will be more profitable to export commodities. The imbalance leads to a fall in the current account, hence a smaller surplus or a bigger deficit. Immediately after the devaluation of a currency, there will be a lag in changing the consumption of imports. The demand for expensive imports and the demand for cheaper exports will be unchanged in the short run, as consumers look for cheaper alternatives.

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