Author Question: Use a J-curve to illustrate the effect on the current account of an exchange rate depreciation. ... (Read 125 times)

rayancarla1 · **on:** Jun 30, 2018

Use a J-curve to illustrate the effect on the current account of an exchange rate depreciation. Explain why the curve has the shape that it does.

What will be an ideal response?

Question 2

The demand for labor is said to be a derived demand because it comes from the demand for goods that labor produces. Suppose that strawberries are a labor-intensive good. An increase in the price of strawberries will ________ the demand for strawberries, which will ________ the demand for strawberry pickers.

A) increase, increase
B) increase, decrease
C) decrease, increase
D) decrease, decrease

Koolkid240 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Graph should look like Figure 11.6 in the text. After a depreciation, there is usually a short period of no noticeable impact on the flow of goods and services. When imports and exports begin to respond, the immediate change is an increase in the value of imports, pushing the current account balance deeper into deficit. A depreciation makes foreign goods immediately more expensive, but it takes time for households and businesses to find substitutes. Over time, domestic buyers substitute away from imports, and likewise, the appreciation of the foreign currency increases the demand for exports (which are also likely to be slow to adjust in the short run). Thus eventually, the current account balance should improve.

Answer to Question 2

A