The exchange rate can "overshoot" its long-run value because the ________ are sluggish in the short run,whereas the __________ adjust instantaneously to a shock.
A) prices in goods and services markets; prices in assets markets
B) foreign exchange markets; prices in assets markets
C) prices in assets markets; prices in goods and services markets
D) prices in bond markets; money balance markets

Question

Quizplus · Accepted Answer

Prices in goods and services markets are typically slower to adjust to shocks than prices in assets markets, such as foreign exchange markets. This can cause the exchange rate to temporarily move beyond its long-run equilibrium value before eventually settling back to that value.

The Exchange Rate Can "Overshoot" Its Long-Run Value Because the ________