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

Expectations of future expansionary monetary policy by a foreign central bank typically lead to a depreciation of the foreign currency in anticipation. This means that the current nominal exchange rate (domestic currency per unit of foreign currency) will increase, as it will take more of the foreign currency to buy one unit of the domestic currency.

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