Question

2. During the 1970s, an unexpected increase in inflation tended to make a currency depreciate. In 2020, it is more likely that increased inflation would cause the AUD to appreciate. Identify the main reason for this apparent paradox.

3。I would like you to read the following paper, which is available via the library, and via Module 9 of our course. Exchange Rate Behaviour During the Great Recession, by John T. Harvey. Journal of Economic Issues, Vol 46, Issue 2, 2012.

Harvey has clearly used both the mental model of exchange rate expectations and the four-quadrant Post-Keynesian model of exchange rates to guide his discussion. Select two from the five periods he refers to in the paper, and illustrate his description of what happened to the EUR/USD exchange rate using both the Post-Keynesian and behavioural/mental models.

4。Both the Dornbusch model and Harvey's model provide explanations of exchange rate overshooting. Explain the possible causes of overshooting in each of the models. Which of the models seems more useful to you? Explain the reasons for your selection.

Answer 1

2.Normally inflation causes currency depreciation,but in some cases inflation leads to currency appreciation,currency appreciation reduce price level the reason is import become cheaper to home country and price reduction also leads to reduce inflation.And the economy is growing fast currency helps to reduce inflation.AUD appreciate because of australias terms of trade,high exchange rate on trade-exposed sector of the economy.

3.period1 (a) Pre-recession collapse (post-keynesian),the financial sector played a dominant role,capital flows drove foreign exchange rate,tremendous volality,currency price swings were clearly excessive,exchange rate fluctuations contributes to sluggish recovery. And 28 percent of dollar depreciate in this periode. (b) post recession cllapse- market had been anti-euro to an even extend , market believe that economic indicator in the us continue to negative, federal reserve actually lead to dollar depreciation ,

4.exchange rate overshooting is the high level of volatility in exchange rate,this model was first introduced by Rudiger Dorn busch, and his assumption was sticky prices ,today sticky prices are used in emperical economic obsevation

Harvey develope overshooting model as Graphical post keynesian model , that is based on keynes Z-D diagram ,endogenous money , a currency market driven by protfolio capital flows.i personally prefer harvey  model of over shooting because which is consolidate all model .They are useful to new situation.