For this question, assume that exchange rates flexible and that ...

[silviawilliams41]

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 2

Graphically illustrate and explain the effects of a decrease in the rate of depreciation () on the Solow growth model. In your graph, clearly label all curves and equilibria.
 
  What will be an ideal response?

[laurnthompson]

Answer to Question 1

A

Answer to Question 2

The depreciation line becomes flatter and at the initial K/N depreciation is now less than investment. In this case, K/N and Y/N will rise. If depreciation is less than saving, it is also less than investment. Alternatively, there is excess investment to offset the amount of capital that wears out. So, the capital stock will increase. This will cause an increase in K/N, Y/N, and S/N. As Y/N rises, so will C/N. This is all shown easily with the graph of the model.