Which of the following best describe the process of "overshooting" when money supply increases?
A) Exchange rates depreciate more than necessary due to overreaction in financial markets, but are restored as prices fall in response to the greater money supply.
B) Exchange rates depreciate more than necessary due to overreaction in financial markets, but are restored as prices rise in response to the greater money supply.
C) Exchange rates appreciate more than necessary due to overreaction in financial markets, but are restored as prices rise in response to the greater money supply.
D) Exchange rates appreciate more than necessary due to overreaction in financial markets, but are restored as prices fall in response to the greater money supply.

Question

Quizplus · Accepted Answer

When there is an increase in money supply, people tend to spend more, creating an increase in demand for goods and services. This, in turn, causes prices to rise. Initially, financial markets may overreact, causing exchange rates to depreciate more than necessary. However, as prices rise in response to the increased money supply, exchange rates are restored. Therefore, option B best describes the process of "overshooting" when money supply increases.

Which of the Following Best Describe the Process of "Overshooting