Explain the exchange rate over-shooting hypothesis
What will be an ideal response?
Many prices in the economy are written into long-term contracts and cannot be changed immediately when changes in the money supply occur. A permanent increase in M, holding P constant, increases the real money supply (M/P) and lowers the nominal interest rate (R). This shifts the dollar return schedule left. A permanent increase in M also creates the expectation that in the long run all prices including the exchange rate would rise. A rise in the expected exchange rate shifts the ERR(DM) schedule right. Therefore, in the short run equilibrium is established at point 2 In the long run the price level adjusts and rises proportionately with the money supply. Therefore, M/P and R return to their initial levels in the long run and the equilibrium exchange rate is determined at point 3. In other words, the exchange rate first overshoots and then returns to its long run level. Therefore, the fluctuations in E are much stronger than those of P.
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Which of the following economists is often credited with establishing the monetarist school of thought?
a. John Maynard Keynes b. Arthur Laffer c. A. W. Phillips d. Milton Friedman
One example of Ricardian rent is:
a. rent paid to landlords under price controls. b. the difference between the price of a highly demanded unique piece of artwork and the opportunity cost of maintaining it. c. the amount paid to a seller above the equilibrium price of tourist class tickets in order to receive higher quality seats in first class. d. the price rise of wool from a disease among sheep.
In perfect competition, as the long run approaches, economic losses will cause
a. the exit of existing firms, shifting the market supply curve to the left b. government regulation c. technological innovation d. inflation e. a favorable shift in tastes and preferences
The labor force includes
A. only those who are employed. B. those who are employed, plus the unemployed. C. the total population, less retirees. D. the total population, less retirees and students. E. the total population, less retirees, students, and government workers.