For this question,assume that exchange rates are flexible and that the exchange rate expected to occur in one year is NOT constant.Suppose that individuals now expect that the foreign central bank will pursue expansionary monetary policy in one year.This expected future monetary expansion by the foreign central bank 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.

Question

Quizplus · Accepted Answer

The expected future monetary expansion by the foreign central bank will make the foreign currency less valuable in the future, so people will demand more of it now in order to lock in the current exchange rate. This will cause the current nominal exchange rate to increase.

For This Question,assume That Exchange Rates Are Flexible and That