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      Question

      The J-Curve effect

      describes:
      A The long-run relationship between inflation and unemployment. Correct Answer Incorrect Answer
      B The short-run deterioration and long-run improvement in the trade balance after a currency depreciation. Correct Answer Incorrect Answer
      C The path of investment over the business cycle. Correct Answer Incorrect Answer
      D The relationship between savings and interest rates. Correct Answer Incorrect Answer
      E None of these Correct Answer Incorrect Answer

      Solution

      Due to pre-existing contracts and slow adjustment of quantities (elasticities are lower in the short run), a depreciation may initially worsen the trade deficit (imports cost more, volumes adjust slowly) before improving it—a path resembling the letter "J".

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