The term 'J-Curve Effect' in international economics refers to:
A. No effect of exchange rate on trade balance
B. Immediate improvement in trade balance after depreciation
C. Initial worsening of trade balance after depreciation followed by improvement
D. Continuous deterioration of trade balance
Answer: Option C
Solution (By JKSSB Mock Tests)
The J-curve effect describes the pattern where a currency depreciation first worsens the trade balance (due to existing contracts) before improving it as quantities adjust.
Explanation:
International risk-sharing allows countries to diversify away country-specific income shocks by holding foreign assets, thereby reducing the volatility of national consumption relative to national output.
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