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The J curve occurs because of differences between short-run and long-run elasticities
The J curve occurs because of differences between short-run and long-run elasticities. Explain why this is so.
Expert Solution
The J-Curve is an economic concept that indicates that after a country's currency depreciated, its trade deficit increases in the short term but improves in the long term.
When a currency depreciates, its exports and imports become cheaper and expensive, respectively. This is because their purchasing rate increases, and the rate of foreign countries purchasing their currency declines.
In the short-term, changes in demand due to currency depreciation are inelastic:
- A fall in the price of exports will only cause a smaller percentage rise in quantity demanded.
- A rise in the price of imports will only cause a smaller percentage fall in demand for imports.
In the long term, demand is elastic and evident hence causing a large difference in the J-Curve:
- A fall in the price of exports will cause a bigger percentage rise in quantity demand.
- A rise in the price of imports will cause a bigger percentage fall in demand for imports.
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