Assume That Exchange Rates Are Flexible and That the Future

question 44

Multiple Choice

Assume that exchange rates are flexible and that the future expected exchange rate in one year is not constant. Suppose that individuals now expect that the domestic central bank will pursue contractionary monetary policy in one year. This expected future monetary contraction 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.
• E) The effects on the current nominal exchange rate depend on future current account balances.

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Definitions:

ROA

Return on Assets, a financial ratio indicating the profitability of a company relative to its total assets.

ROE

Return on Equity, a financial ratio that measures the profitability of a business in relation to shareholder's equity.

Fixed Assets

Long-term tangible assets used in the operations of a business that are not expected to be converted into cash in the near future.