Explain briefly what an "overvalued" currency is. Would you change your explanation depending upon whether or not there is central bank intervention or not? Discuss
What will be an ideal response?
? In the case of no intervention (i.e., pure flexible exchange rate regime) the exchange rate is actually the free-market equilibrium rate. Then the term "overvalued" implies that this equilibrium is but a temporary deviation from PPP, and over time the exchange rate will fall in line with the inflation differential.
? In the case of central bank intervention we can talk about a currency being overvalued or undervalued relative to the free market since this intervention interrupts the free adjustment of the exchange rate to market clearing levels.
? Because PPP does not hold well in the short run, we must always have currencies that appear "overvalued" or "undervalued" in a PPP sense.
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The long-run aggregate supply curve is the relationship between the quantity of real GDP supplied and ________ when ________
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