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      Question

      The 'Dornbusch Overshooting Model' is often used to

      explain high exchange rate volatility. It primarily assumes that:
      A Both goods prices and asset prices are sticky. Correct Answer Incorrect Answer
      B Both goods prices and asset prices are perfectly flexible. Correct Answer Incorrect Answer
      C Goods prices are sticky in the short run, while asset prices adjust instantaneously. Correct Answer Incorrect Answer
      D Exchange rates are determined solely by trade balances. Correct Answer Incorrect Answer

      Solution

      This price stickiness forces the exchange rate to "overshoot" its long-run equilibrium value to clear the money market in the short run.

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