If a strong, persistent trend in the exchange rate appears to be inconsistent with any form of economic fundamentals, it is called:
A)exchange rate parity.
B)a speculative bubble.
C)overshooting.
D)uncovered speculation.

Question

Quizplus · Accepted Answer

A speculative bubble is a situation where the exchange rate is driven by market expectations and speculation, rather than economic fundamentals. This can result in a persistent trend that is not sustainable and leads to a quick reversal once the bubble bursts. Overshooting, on the other hand, refers to a temporary deviation of the exchange rate from its long-run equilibrium level due to market shocks or changes in economic policies. Exchange rate parity and uncovered speculation are related to different concepts and do not apply to this situation.

If a Strong, Persistent Trend in the Exchange Rate Appears