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.
Ans: d. the trade balance decreases and then increases over time giving the curve a J shape.
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In order to assess the relationship between the real exchange rate and total exports for any nation, one must construct a real effective exchange rate that measures:
a. a composite of each trading partner's real exchange rate change weighted by the share of trade. b. the exchange rate that would exist with no inflation and balanced trade. c. the average of all nominal exchange rates since we assume no inflation. d. nominal trade adjusted for inflation.
The term externalities refers to
A) consequences of action not taken into account in making decisions. B) social interactions associated with urban-industrial economies. C) the superficial consequences of decisions. D) the visible consequences of decisions.