In a freely floating exchange rate system, exchange rates tend to overshoot after a monetary contraction, since
A)interest rates adjust immediately but exchange rates and prices adjust only gradually
B)prices and interest rates adjust immediately but exchange rates adjust only gradually
C)exchange rates adjust immediately but prices adjust only gradually
D)the gain in competitiveness causes a temporary increase in output
E)none of the above

Question

Quizplus · Accepted Answer

Exchange rates adjust quickly to new monetary conditions due to immediate reactions in the forex markets, while prices in the goods and services markets are slower to adjust, leading to overshooting of the exchange rate.

In a Freely Floating Exchange Rate System, Exchange Rates Tend