An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.
A) Overshoot
B) Undershoot
C) Depreciate
D) Appreciate

Question

Quizplus · Accepted Answer

An exchange rate overshot when its short-run response to a change in market fundamentals like interest rates or inflation is greater than its long-run response. This typically happens when there is an unexpected change in the market, leading to a quick and dramatic reaction in the exchange rate that is unsustainable over the long term. In other words, the rate may move too far in the short term, correcting itself over time as market forces stabilize.

An Exchange Rate Is Said to ____ When Its Short-Run