Explain briefly what an overvalued currency is. Would you change ...

[DelorasTo]

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?

Question 2

Trade theorists have proven that the gains from international trade
 
  A) must raise the economic welfare of every country engaged in trade.
  B) must raise the economic welfare of everyone in every country engaged in trade.
  C) must harm owners of specific factors of production.
  D) will always help winners by an amount exceeding the losses of losers.
  E) usually outweigh the benefits of protectionist policies.

[Pswine]

Answer to Question 1

 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.

Answer to Question 2

E