Question

Q. The J Curve effect often seen in the news is in relation to which of the following?

• A. Effect of depreciation on the trade Balance
• B. Economic growth trajectory after lockdown
• C. Impact of regulation on Corporate Bonds
• D. Effect on tax base with increase in the tax rates

Answer 1

The correct option is A Effect of depreciation on the trade Balance

Explanation:

• It refers to a phenomenon wherein the trade balance of a country worsens following the depreciation of its currency before it improves. Depreciation in the value of a currency is expected to improve the economy’s overall trade balance by encouraging exports and discouraging imports.
• However, practical conditions in the market prevent the benefits from materialising immediately. Many importers and exporters in the country, for instance, may be locked into binding agreements that could force them to buy or sell a certain number of goods despite the unfavourable exchange rate of the currency.