ECON 345 Study Guide - Midterm Guide: Foreign Exchange Market, Money Supply
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One potential problem with these theories is that exchange rates are much more volatile than relative money supplies or relative income levels. Brie y explain how the concept of exchange rate overshooting" can help to explain why exchange rates are so volatile. Illustrate how the economy responds over time to a permanent money supply increase. Explain intuitively why overshooting occurs: using the dd-aa model, illustrate the short-run and long-run e ects of a permanent. Assume the economy is initially in long-run equilibrium (i. e. , output equals its full employment level).
