For this question,assume that exchange rates flexible and that the exchange rate expected to occur 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.

Question

Quizplus · Accepted Answer

Expectations of future expansionary monetary policy typically lead to a depreciation of the domestic currency in the present. This is because investors anticipate that future inflation will reduce the currency's value, leading them to sell off the currency now, which decreases its current nominal exchange rate.

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