What does the J-curve effect describe in the context of currency depreciation?

Show Answers

Gross Domestic Product tends to fall before rising following a currency depreciation.The trade balance often deteriorates initially before improving after a currency depreciation.The trade balance typically improves first and then worsens after a currency appreciation.Gross Domestic Product usually declines before increasing after a currency appreciation.None of the above.

Explanation

The J-curve effect explains that after a currency depreciates, the trade balance initially worsens due to existing contracts and price effects, but eventually improves as exports become more competitive and imports more expensive.