Why does exchange rate overshooting typically happen?

Show Answers

Because local prices take time to respond to changes in demandDue to increased defense expenditures during warsSince elasticities tend to be lower over the long term compared to the short termBecause elasticities are lower in the short term than they are in the long term

Explanation

Exchange rate overshooting occurs because the responsiveness (elasticities) of economic variables is generally smaller in the short run than in the long run, causing exchange rates to react more sharply initially before settling over time.