Why would making a permanent change in a monetary aggregate have an effect on exchange rates in a nation?
A) Permanent rates are mostly set by short-run fluctuations in the rate of interest caused by monetary instability.
B) A permanent change is never quite as permanent as policy makers claim-people form expectations on past performance rather than declarations.
C) The central bank is always aware of the effect on exchange rates as it formulates policy, so it is very careful to make small permanent changes that have no effect on exchange rates.
D) Traders form expectations of future exchange rates based on the anticipated long-run effects of monetary operations.

Question

Quizplus · Accepted Answer

Traders form expectations of future exchange rates based on the anticipated long-run effects of monetary operations. If a central bank makes a permanent change in a monetary aggregate, traders will anticipate its long-run effects on the economy and make adjustments to their expectations of future exchange rates, which could affect the current exchange rate.

Why Would Making a Permanent Change in a Monetary Aggregate