Which of the following describes why exchange rate overshooting occurs?

Exchange rate overshooting occurs because exchange rates tend to be more flexible than other prices; exchange rates often depreciate/appreciate more in the short run than in the long run so as to compensate for other prices that are slower to adjust to their long run equilibrium levels.Click to see full answer. Also, what is meant by exchange rate overshooting?The term overshooting indicates the excessive fluctuation of the nominal exchange rate in response to a change in the monetary supply. This phenomenon, first defined by Dornbusch (1976) and due to price stickiness, contributes to explaining the high volatility displayed by nominal exchange rates. what is the cause of exchange rate overshooting according to the Dornbusch model? The overshooting model argues that the foreign exchange rate will temporarily overreact to changes in monetary policy to compensate for sticky prices of goods in the economy. So, then, initially, foreign exchange markets overreact to changes in monetary policy, which creates equilibrium in the short term. Correspondingly, what is meant by exchange rate overshooting quizlet? An exchange rate is said to overshoot when its short-run response (either depreciation or appreciation) to a change in market fundamentals is greater than its long-run response. This is because rapidly growing productivity rates lead to more sales and generate a greater demand for the domestic currency.What methods do currency forecasters use to predict future changes in exchange rates? Different Methods of Forecasting Exchange Rates Better Than Tea Leaves. Unlike reading tea leaves, forecasting exchange rates employs analytical principles to determine future rates. Purchasing Power Parity. Purchasing power parity (PPP) is a commonly-used method based on the theory of the Law of One Price. Relative Economic Strength Approach. Econometric Models.