shock in a flexible exchan

International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter9: Forecasting Exchange Rates
Section: Chapter Questions
Problem 5BIC
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Identify the statement as True, False, or Uncertain, and explain your reasoning: Consider a temporary positive inflation shock in a flexible exchange rate regime (with an inflation targeting central bank) and in a fixed exchange rate regime (where there is no policy intervention). Assume that both economies converge to a medium run equilibrium. Following the shock, inflation converges to its equilibrium value from above in both cases.
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