Money neutrality means that in the long run the domestic interest rate remains unchanged from an increase in the money supply,implying that the fall in the exchange rate is greater in the ________ run than in the ________ run,a phenomenon called exchange rate overshooting.

Question

Quizplus · Accepted Answer

In the short run, prices are sticky, so an increase in the money supply leads to a lower interest rate and a depreciation of the currency. In the long run, prices adjust, and the interest rate returns to its original level, causing the exchange rate to overshoot its long-run level initially.

Money Neutrality Means That in the Long Run the Domestic