4. The J-curve Effect: Time Path of Depreciation Consider trade in automobiles between the United States and Europe. The average European car costs 15,000. Suppose that the United States does not import any other goods and seryices from other countries. In March, the U.S. dollareuro exchange rate is $1.16 per euro, and the United States imports 90,000 European cars at this exchange rate. Therefore, in March, the United States spends a total of V on imported European cars. If the total value of U.S. exports is $0.52 billion, the United States has net exports of V . In May, the U.S. dollareuro exchange rate rises to $1.31 per euro. U.S. consumers respond to the dollar depreciation by reducing their imports to 85,000 European cars. Assuming that the average cost of a European car remains 15,000, the United States spends a total of V on imported European cars in May. If the total value of U.S. exports remains $0.52 billion, the United States has net exports of V . Suppose the U.S. dollareuro exchange rate remains at $1.31 per euro for the rest of the year, and the average cost of a European car remains 15,000. In October, the United States reduces its imports to ?5,000 European cars. As a result, the United States spends a total of v on imported European cars. In October, the dollar depreciation that occurred in May finally affects foreign demand: U.S. goods become relatively less expensive for foreigners, causing the demand for U.S. goods to increase. As a result, the total value of U.S. exports rises to $1.57 billion in October. The United States has net exports of V . On the following graph, use the orange points (square symbof) to pfot the value of U.S. net exports in March, May, and October. (Note: The numbers on the xaxr's denote the months of the year. For example, 1 stands for January, 2 for February, and so on.) Note: Select and drag the curve from the palette to the graph. To move a point on the curve, select and drag to the desired position. On the following graph, use the orange points (square symbol) to plot the value of U.S. net exports in March, May, and October. (Note: The numbers on the x-axis denote the months of the year. For example, 1 stands for January, 2 for February, and so on.) Note: Select and drag the curve from the palette to the graph. To move a point on the curve, select and drag to the desired position. 1.0 Net Exports 0 NET EXPORTS (Billions of dollars) -0.5 1.0 1.5 1 2 3 4 5 6 7 8 9 10 11 12 TIME (Month of year)