Question

1. According to the J-curve theory, a sudden depreciation in a nation's currency will cause a temporary decrease in the balance of trade.

TRUE OR FALSE

2. Generally, there is an inverse relationship between a country's income and its demand for imports.

TRUE OR FALSE

3. Transactions between the US and the rest of the world are shown below.

1. US citizens spend 50 million dollars visiting China.
2. American companies sell 30 million dollars worth of stock to foreign investors.
3. US citizens receive 10 million dollars worth of dividend payments from foreign corporations.
4. US government buys 5 million dollars worth of bonds.
5. American citizens purchase 35 million dollars worth of Japanese produced vehicles.
6. US government buys 18 million dollars worth of gold.
7. Ford sells 80 million dollars worth of cars overseas.
8. US corporations receive 4 million dollars in interest from foreign corporations.
9. US citizens send 16 million dollars in disaster relief to Haiti.

What would be the initial impact that the US balance trade would have on the value of the dollar?

a. The dollar would increase

b. The dollar would decrease

c. The dollar would remain constant

d. Cannot be determined

Answer 1

1.

The correct answer is True.

According to the J-curve theory, a sudden depreciation in a nation's currency will cause a temporary decrease in the balance of trade.

Balance of trade(BOT) is the difference between the exports of goods and the import of goods.

According to J curve theory, due to a sudden depreciation in a nation's currency initially the balance of trade will fall and in case of BOT deficit, it will be worsen due to the rising prices of imports and fall in the price of exports as in short time the demand in less elastic to price movements.

Hope it helps!