Consider the figure in the lecture representing the US money market and foreign exchange market to analyze the dollar/euro exchange rate. Fill in the blanks of the following explanation of overshooting of the exchange rates.

A permanent increase in the money supply of the US, holding the price level (P) of the US constant (by assuming the short-run economy), increases the real money supply (M/P) of the US and lowers the interest rate (R) of the US.

Then in the foreign exchange market, the line that represents the return of dollar deposits (in $ terms) is shifted to the . In addition, the curve that represents the expected euro deposit's return (in $ terms) to the .

Select one:

a. left, left

b. left, right

c. right, left

d. right, right

Answer rating: 100% (QA)

d right right Explanation Overshooting happ... View the full answer