The phenomenon of overshooting is based on the existence of:
A)covered interest parity.
B)irrational investor behavior.
C)sticky prices and the belief that PPP and the monetary approach hold in the long-run.
D)perfectly competitive global markets and flexible prices.

Question

Quizplus · Accepted Answer

Overshooting occurs when exchange rates temporarily move more than expected in response to a shock, before eventually moving back to their long-run equilibrium. This phenomenon is based on the belief that PPP and the monetary approach hold in the long-run, as well as sticky prices. This means that in the short-run, changes in interest rates or other economic variables can lead to temporary deviations from the long-run equilibrium exchange rate.

The Phenomenon of Overshooting Is Based on the Existence Of