In a flexible exchange rate regime, an increase in the expected future exchange rate will cause:
A) the IP curve to shift to the right/down.
B) the IP curve to shift to the left/up.
C) a movement along the IP curve.
D) the IP curve to become vertical.
E) the IP curve to become horizontal.

Question

Quizplus · Accepted Answer

An increase in the expected future exchange rate makes domestic assets more attractive, leading to an increase in capital inflows and causing the IP curve to shift to the right/down.

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