From full long-run equilibrium, expectations of future exchange rates can only change when there is a:
A) political change.
B) permanent change in the quantity of money.
C) change in short-run interest rates.
D) temporary decrease in the quantity of money.

Question

Quizplus · Accepted Answer

In the long run, the exchange rate is determined by the relative productivity, tastes, and factor endowments of countries. Expectations of future exchange rates cannot change in the long run unless there is a permanent change in the quantity of money, which affects the relative prices of goods and services between countries and, thus, the exchange rate. A temporary decrease in the quantity of money will not affect long-run expectations, as it is expected to be reversed in the future. Political changes are not strictly relevant to exchange rate expectations in the long run, and short-run interest rates do not have a significant impact on long-run exchange rate expectations.

From Full Long-Run Equilibrium, Expectations of Future Exchange Rates Can