Author Question: When we no longer assume that the exchange rate expected to occur in one year is constant, explain ... (Read 95 times)

biggirl4568 · **on:** Jun 30, 2018

When we no longer assume that the exchange rate expected to occur in one year is constant, explain what variables affect the current exchange rate in a flexible exchange rate regime. Include in your answer an explanation of how changes in these variables affect the current exchange rate.

What will be an ideal response?

Question 2

Explain the two relations that determine the evolution of output in the long run.

What will be an ideal response?

bigsis44 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The current one-year domestic rate and future expected one-year domestic rates. Also, the current one-year foreign rate and future expected one-year foreign rates. And finally, some long-run nominal expected future exchange rate. Changes in the current one-year domestic and foreign rates have the same effect as described earlier. Changes in the future expected domestic rate will effect the exchange rate that is expected to occur at some point. This will affect the current exchange rate. The same type of analysis applies to the foreign rate. And finally, the long-run expected exchange rate will affect E as well in the same way it did before.

Answer to Question 2

The amount of capital determines the amount of output being produced. The amount of output determines the amount of saving and in turn, the amount of capital being accumulated over time.