(a) Explain what is mean by exchange rate overshooting and undershooting. (b) Explain the GG, MM, and PPP lines and equilibrium in the Dornbusch model. (a) Explain what is mean by exchange rate overshooting and undershooting. (b) Explain the GG, MM, and PPP lines and equilibrium in the Dornbusch model. (b) Explain the GG, MM, and PPP lines and equilibrium in the Dornbusch model. Solution A. With a change in the monetary supply the nominal exchange rate fluctuates. This also reflects the volatility of the exchange rate. Twitch a change in money supply , the prices do not adjust immediately hence resulting in stickiness . This is why exchange rate overshooting happens. Undershooting is said to occur when the exchange rate level in the short run is less than that in the long run. If an increase in money supply increases the interest rates . However it is unlikely to occur in reality..