Author Question: For this question, assume that exchange rates are flexible and that the exchange rate expected to ... (Read 179 times)

hubes95 · **on:** Jun 30, 2018

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 2

Explain the difference between fully funded social security system and pay-as-you-go social security system.

What will be an ideal response?

k2629 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

Fully funded social security system taxes workers, invests their contributions in financial assets, and pays back the principal plus the interest to the workers when they retire. Pay-as-you-go system taxes workers and redistributes the tax contribution as benefits to the current retirees. There are two major differences between the two systems. First, what retirees receive is different in each case. Second, the two systems have different macroeconomic implications. In both systems private saving goes down. But in the fully funded system, public saving goes up and it has no effect on total saving and no effect on capital accumulation. In the pay-as-you-go system, the decrease in private saving is not compensated by an increase in public saving. Total saving goes down, and so does capital accumulation.