1 a What is the likely effect of domestic currency depreciat

1. (a) What is the likely effect of domestic currency depreciation on exports?

(b) What is the J-curve in this regard?

Solution

1.a) A weaker dmestic currency get to stimulate the exports and makes the imports expensive and with that, the trade deficit of a country will come down with time.

b) In the J curve, the higher exchange rate first corresponds to more costly imports and less valuable exports, leading to a bigger initial deficit or a smaller surplus on the whole. However the balance of trade eventually improves to better levels compared to before devaluation on the whole.