Exchange rate overshooting occurs (A) under fixed exchange rates when the central bank mistakenly buys or sells too much foreign exchange (B) under fixed exchange rates as a necessary part of the adjustment process for any monetary shock (C) under flexible exchange rates when the exchange rate rises (depreciates) above and then falls down to equilibrium after a monetary expansion (D) under flexible exchange rates, so that large financial shocks in the domestic economy have very little impact on exchange rates

DSE 2006 Question 19: Open-economy macroeconomics

Exchange rate overshooting occurs

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Open-economy macroeconomics has come up 55 times in 7 exams since 2006.

This question is on The impossible trinity and exchange rate dynamics, part of Open-economy macroeconomics in International Economics.

The three goals no country can have together, and overshooting.

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