In Dornbusch's Overshooting Model, the exchange rate adjusts A. Instantaneously to its long-run equilibrium level B. Gradually over time to its long-run equilibrium level C. Independently of changes in interest rates D. Only in response to changes in fiscal policy
Question
In Dornbusch's Overshooting Model, the exchange rate adjusts A. Instantaneously to its long-run equilibrium level B. Gradually over time to its long-run equilibrium level C. Independently of changes in interest rates D. Only in response to changes in fiscal policy
Solution 1
In Dornbusch's Overshooting Model, the exchange rate adjusts instantaneously to its long-run equilibrium level. So, the correct answer is A. Instantaneously to its long-run equilibrium level. This model suggests that because of the slow adjustment of prices, the exchange rate will overreact to changes in monetary policy, leading to an "overshooting" of the long-run equilibrium exchange rate.
Solution 2
In Dornbusch's Overshooting Model, the exchange rate adjusts A. Instantaneously to its long-run equilibrium level. This model suggests that when there is a change in monetary policy, the exchange rate will immediately overshoot its long-run equilibrium level and then gradually converge back to it. This is due to the fact that financial markets adjust more quickly than goods markets.
Solution 3
In Dornbusch's Overshooting Model, the exchange rate adjusts A. Instantaneously to its long-run equilibrium level. This model suggests that when there is a change in monetary policy, the exchange rate will immediately overshoot its long-run equilibrium level and then gradually converge back to it. This is due to the fact that financial markets adjust more quickly than goods markets.
Similar Questions
Dornbusch's Overshooting Model explains the short-run dynamics of: A. Unemployment and inflation B. Exchange rates and interest rates C. Fiscal policy and government spending D. Consumption and saving
According to Dornbusch's Overshooting Model, the short-run exchange rate volatility is mainly driven by: A. Expectations of future changes in fiscal policy B. Expectations of future changes in money supply C. Government intervention in the foreign exchange market D. Fluctuations in international trade balances
According to Dornbusch's Overshooting Model, a monetary expansion will lead to: A. A depreciation of the domestic currency B. An appreciation of the domestic currency C. No change in the exchange rate D. A decrease in interest rates
onsider an open economy with fixed exchange rates. (a) With the aid of the IS-LM diagram, show the effects of a domestic fiscal expansion on domestic output and domestic interest rate
In the short-run open economy model, What is fixed exchange rate regime implies? A. The government can adjust interest rates freely B. Capital flows are completely unrestricted C. The government cannot influence the exchange rate D. Inflation rates are fixed
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