W2P4 - Notebook LM Flashcards
What conditions are combined in the overshooting model?
UIP condition (short run), relationship between money supply and prices (long run), and PPP (long run).
What is the impact of increased money supply on currency value, according to PPP?
Leads to currency depreciation over time.
What is the definition of ‘overshooting’ in the overshooting model?
In the short run, interest rates decline, causing the exchange rate to decline even more than implied by long-run PPP values.
What variables are endogenized in the overshooting model?
Nominal exchange rate, domestic prices, and domestic interest rate.
What variables are exogenous in the overshooting model?
Output, money supply, foreign prices, and foreign interest rates.
Which conditions hold in the short run?
Money market and UIP conditions.
Which condition is a long-run relationship?
PPP condition.
What is the shape of the PPP schedule in the graphical representation of the model?
Downward sloping.
What is the implication for domestic and foreign interest rates in the long run?
Domestic interest rates equal foreign interest rates.
What happens to prices and the nominal exchange rate when the money supply increases?
Prices increase over time, and the nominal exchange rate depreciates.
What is the slope of the money market (MM) schedule?
Upward sloping.
What happens to the MM schedule when the money supply increases?
Shifts to the right.
What is the role of sticky prices in overshooting?
Overshooting depends on sticky prices.
What is the impact of increased real money supply in the short run?
Decreases the nominal interest rate, leading to currency appreciation over time (UIP condition).
What does overshooting cause in the nominal exchange rate?
Excess volatility.
