IMF01

The exchange rate is said to overshoot when

• Its immediate response to a disturbance is greater than its long-run response.

• Its immediate response to a disturbance is less than its long-run response.

• Its immediate response to a disturbance is the same as its long-run response.

• Its immediate response to a disturbance is not related to its long-run response.

After a permanent increase in the money supply

• The exchange rate overshoots in the short run.

• The exchange rate overshoots in the long run.

• The exchange rate smoothly depreciates in the short run.

• The exchange rate smoothly appreciates in the short run.

• The exchange rate remains the same.

Assuming an increase in domestic money supply, what is the short-run effect on the domestic interest rate, exchange rate, and price level?

• Domestic interest rate rises;

  Domestic currency depreciates;

  Price level rises.

• Domestic interest rate falls;

  Domestic currency depreciates;

  Price level is fixed.

• Domestic interest rate falls;

  Domestic currency appreciates;

  Price level is fixed.

Dornbusch model aims to explain the high volatility of floating

exchange rates due to ’sticky’ prices in the short run.

• True

• False

Dornbusch model can be used to analyze the exchange rate

fluctuation in China.

• True

• False

Extension:

If a country has capital controls, would its exchange rate be unaffected by a tightening in monetary policy?

• Yes.

• No, the domestic currency would appreciate.

• No, the domestic currency would depreciate.

Financial markets adjust to shocks far

more rapidly than goods markets.

• True

• False

A permanent increase in a country's money supply causes a proportional long-run depreciation of its currency.

• True

• False