Show the phenomenon of overshooting, International Economics

Q. Using the DD - AA framework, show the phenomenon of overshooting.  Use a figure to explain when it is taking place.

Answer: The figure below illustrates the phenomenon of overshooting. A permanent raise in the money supply starting from full employment equilibrium will shift the AA curve to the right from AA1 to AA2. Now a progressively rising price level shifts the AA and the DD schedules to the left until a new long-run equilibrium is reached.  Note that point 3 is above point 1 for the reason that Ee is permanently higher after a permanent increase in the money supply. The predictable exchange rate Ee has raised by the same percentage as Ms. Notice that beside the adjustment path between the initial short-run equilibrium (point 2) and the long-run equilibrium (point 3) the domestic currency essentially appreciates (from E2 to E3) following its initial sharp depreciation (from E1 to E2). This exchange rate deeds is an example of Overshooting in which the exchange rate's initial response to some change is greater than its long-run response.

1485_Show the phenomenon of overshooting.png

Posted Date: 6/27/2013 3:42:47 AM | Location : United States







Related Discussions:- Show the phenomenon of overshooting, Assignment Help, Ask Question on Show the phenomenon of overshooting, Get Answer, Expert's Help, Show the phenomenon of overshooting Discussions

Write discussion on Show the phenomenon of overshooting
Your posts are moderated
Related Questions
Q. Explain why under fixed exchange rate, monetary policy is ineffective whereas under floating exchange rate it is effective in rising output. Answer:  In floating by purchasi

Q. It is argued that the United States could be foolish to maintain a free-trade stance in a world in which all other countries exploit prisoner or child labor, or are protectioni

what is the free trade


illustrate the circular flow of income of an open economy and explain the effects of various injections and withdrawal in the circular flow?

Budget: An estimate of all anticipated revenue and expenditure of the government for the ensuing financial year is called budget. The budget of the state is a document contain

Question A hypothetical utility company has two facilities that are virtually identical. They are nuclear power plants and one is located in California and the second one in Fl

Q. Describe the chain of events leading to exchange rate determination for the following cases: 1. An increase in the U.S money supply 2. An increase in the growth rate of the

the year of alternative / new trade theoriess