True or False?
False! The greater the share of foreign goods in domestic absorption---that is, in domestic consumption and investment---the bigger will be the effect of a change in the nominal exchange rate on the correctly measured price level entering into the asset equilibrium equation. Hence, a smaller movement of the exchange rate will be required to move this price level in the same proportion as the shock to the money supply or demand for money in the short run before anything else can adjust. The degree of overshooting will be smaller.