Currently, you can exchange $1 for £0.53. Assume that the average inflation rate

Question

Currently, you can exchange $1 for £0.53. Assume that the average inflation rate in the U.S. over the next four years will be 4% annually as compared to 5% in the U.K. Based on relative purchasing power parity, you should expect the _____ over the next 4 years.

a. both the U.S. dollar and the British pound to appreciate against all other currencies
b. British pound to appreciate against the U.S. dollar
c. U.S. dollar to appreciate against all currencies
d. U.S. dollar to appreciate against the British pound
e. British pound to appreciate against all currencies

Explanation / Answer

d. U.S. dollar to appreciate against the British pound

based on This proposition states that the rate of appreciation of a currency is equal to the difference in inflation rates between the foreign and the home country.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.