1. Floating Exchange Rate:
Shocks and Responses
Temporary Shocks
Everything returns to where it started: Ee = E0
Permanent Shocks
Immediately expect things to end up where they will settle in long-run: Ee = E*
Monetary Shock
Fiscal (Real) Shock
Immediate Responses:
P = P0 ; Y = Y0
Ee = E*
R and E can change
R < R0
E > E0
E >> E0
Overshooting
Short-Run Responses:
P = P0
R, E, CA and Y can change
Y > Y0
Long-Run Responses:
R = R0 ; Y = Y0
If Y>Y0 in short-run equilibrium, P increases until
M*/P* = M0/P0
R = R0
E = E0
Back to Go
R* = R0
P* > P0
E* > E0
Y* = Y0

2. Floating Exchange Rate:
Shocks and Responses
Temporary Shocks
Everything returns to where it started: Ee = E0
Permanent Shocks
Immediately expect things to end up where they will settle in long-run: Ee = E*
Monetary Shock
Fiscal (Real) Shock
Immediate Responses:
P = P0 ; Y = Y0
Ee = E*
R and E can change
R < R0
E > E0
R = R0
E = E0
E >> E0
Overshooting
E < E0
Y = Y0
CA crowded out
Short-Run Responses:
P = P0
R, E, CA and Y can change
Y > Y0
R > R0
CA < CA0
Long-Run Responses:
R = R0 ; Y = Y0
If Y>Y0 in short-run equilibrium, P increases until
M*/P* = M0/P0
Back to Go
R* = R0
P* > P0
E* > E0
Y* = Y0
P* = P0
E* < E0