"Following a shock to the equilibrium,prices will adjust slowly to the new equilibrium level,whereas exchange rates and interest rates adjust quickly.This causes the spot exchange rate to move too much before returning to the equilibrium level." This idea is called _______.
A) hyper-exchange rate effect
B) panic effect
C) overshooting effect
D) imperfect equilibrium effect

Question

Quizplus · Accepted Answer

The idea described is commonly known as the overshooting effect, where exchange rates move more than what would be expected given the change in fundamentals, before eventually adjusting to the new equilibrium level. The other answer choices are not commonly used in economics to refer to this phenomenon.

"Following a Shock to the Equilibrium,prices Will Adjust Slowly to the New