If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?
A) 1.257
B) 1.145
C) 0.8730
D) 0.7955

Question

Quizplus · Accepted Answer

The exchange rate adjusts according to the relative inflation rates. The formula is: New Exchange Rate = Old Exchange Rate * (1 + Inflation Rate in US) / (1 + Inflation Rate in Europe). So, 1.20 * (1.05/1.10) = 1.145.

If the Exchange Rate Between the U