Which of the Following Options Correctly Reflect the Assumptions in the Overshooting

question 40

Multiple Choice

Which of the following options correctly reflect the assumptions in the Overshooting Approach?

• A) both PPP and CIRP hold in the short run.
• B) PPP holds in the short run, but CIRP does not.
• C) CIRP holds in the short run, but PPP does not.
• D) Neither PPP nor CIRP holds in the short run.

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Definitions:

Direct Quotes

The exchange rate for foreign currencies quoted in units of the domestic currency per one unit of the foreign currency.

Direct Quote

A representation of the amount of foreign currency required to buy or sell one unit of the domestic currency in the foreign exchange markets.

Country C's Currency

The legal tender issued by a sovereign government or central authority of country C.

Country D's Currency

The official currency issued and used for financial transactions in Country D.