International monetary economics:

Use the 3-equation open economy model to answer the following questions: (i) Why would exchange rate overshooting happens after a demand shock. Use an AD-ERU diagram to explain your answer. {Roughly 500 words + prevalent diagrams} (ii) What causes exchange rate overshooting? {Roughly 150 words} (iii) How could you modify the 3-equation open economy model so that exchange rate overshooting does not occur? Explain the economic intuition in words. {Roughly 400 words}

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