The J - curve explains that depreciation lowers the domestic interest rate and hence will lead to an increase in domestic consumption and investment.

The J - curve explains that depreciation lowers the domestic interest rate and
hence will lead to an increase in domestic consumption and investment. Do you
agree? Explain.

Solutions

Expert Solution

The given statement is not true.This is because J-curve effect shows that the nation's trade balance first deteriorates before improving as a result of depreciation or devaluation.

This is due to the tendency of the domestic-currency price of imports to rise faster than export prices soon after the devaluation or depriciation, with quantities initially not changing very much. Over time, the quantity of exports rises and the quantity of imports fall, and export prices catch up with the import prices, so that the initial deterioration in the nation's trade balance is halted and then reversed.

Rahul Sunny answered 1 year ago

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