In a flexible exchange rate regime,an increase in the expected future exchange rate will cause
A)the IP curve to shift to the left / up.
B)the IP curve to shift to the right / down.
C)a movement along the IP curve.
D)neither a shift nor movement along the IP curve.

Question

Quizplus · Accepted Answer

In a flexible exchange rate regime, an increase in the expected future exchange rate (meaning the domestic currency is expected to depreciate) makes domestic assets less attractive to foreign investors. This leads to a decrease in capital inflow or an increase in capital outflow, reducing the demand for the domestic currency. As a result, the Investment-Saving (IS) curve, often referred to here as the IP curve for consistency with the question, shifts to the right/downward due to the expected decrease in investment caused by the outflow of capital and the more expensive cost of borrowing.

In a Flexible Exchange Rate Regime,an Increase in the Expected