Overshooting is when exchange rates:
A) adjust more in the short run than they need to for long-run equilibrium.
B) adjust less in the short run than they need to for long-run equilibrium.
C) are unable to adjust because of fixed exchange rates.
D) adjust at the same rate as prices.

Question

Quizplus · Accepted Answer

Overshooting occurs when exchange rates adjust more in the short run than they need to for long-run equilibrium. This means that the exchange rate temporarily moves further away from its eventual equilibrium level before settling down to the long-run equilibrium level. This can happen because of factors such as market sentiment, speculation, and incomplete information.

Overshooting Is When Exchange Rates