Assume that exchange rates are flexible and that the future expected exchange rate in one year is not constant. Suppose that individuals now expect that the domestic central bank will pursue expansionary monetary policy in one year. This expected future monetary expansion will cause which of the following to occur?
A) The current nominal exchange rate will decrease.
B) The current nominal exchange rate will increase.
C) The current nominal exchange rate will not change.
D) The effects on the current nominal exchange rate are ambiguous.
E) The effects on the current nominal exchange rate depend on future current account balances.

Question

Quizplus · Accepted Answer

Expansionary monetary policy will increase the money supply and potentially lead to inflation. This will decrease the value of the domestic currency relative to other currencies, causing the nominal exchange rate to decrease.

Assume That Exchange Rates Are Flexible and That the Future