Use the 3-equation open economy model to answer the following questions: (a) Explain what the following statement

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Use the 3-equation open economy model to answer the following questions:

(a) Explain what the following statement means: 'after a demand shock in a small open economy, the exchange rate often overshoots'. Use an AD - ERU diagram to help explain your answer.

(b) What causes exchange rate overshooting?

(c) What problems, if any, would you expect exchange rate overshooting to cause?

(d) How could you modify the 3-equation open economy model so that exchange rate overshooting does not occur? Explain in words.

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Macroeconomics Institutions Instability And The Financial System

ISBN: 9780199655793

1st Edition

Authors: Wendy Carlin, David Soskice

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Question Posted: Jun 10, 2024 02:10 AM

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Use the 3-equation open economy model to answer the following questions: (a) Explain what the following statement

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Macroeconomics Institutions Instability And The Financial System

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