Exam 22: The Monetary and Portfolio Balance Approaches to External Balance

(a) Could there be "overshooting" of the exchange rate in the Dornbusch model if goods markets adjusted as rapidly as asset markets? Why or why not? (b) What would be the analog to the general phenomenon of "overshooting" in a situation of fixed exchange rates?

Explain the implication for a country’s exchange rate in the monetary approach and in the portfolio balance approach of (a) an autonomous decline in the demand for money at each interest rate by the country’s citizens, and (b) a change in expectations by the country’s citizens such that less inflation is expected in the future.

In the monetary approach to the balance of payments, under flexible exchange rates, an Increase in the proportion of income that people in country A wish to hold as money Would, other things equal, lead to an __________ in country A's balance of payments and Therefore to __________ of A's currency in the foreign exchange markets.

Describe a scenario that will make the current three-months forward rate on a foreign currency equal to the expected spot rate in three months for that currency. What might prevent this result from occurring?