After a permanent increase in the money supply

Question

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According to the overshooting hypothesis, after a permanent increase in the money supply, the exchange rate will overshoot in the short run before eventually returning to its long-run equilibrium level. This is due to the fact that immediately after the increase in money supply, there will be excess demand for domestic goods, services, and assets, leading to an increase in prices and interest rates in the short run. This increased interest rate will then cause an appreciation in the exchange rate in the short run, before eventually returning to its long-run equilibrium level as prices and interest rates adjust.

After a Permanent Increase in the Money Supply