Assume the initial dollar/pound exchange rate to be $2 per pound.If the U.S.inflation rate is 8 percent, and the U.K.inflation rate is 3 percent, then the exchange rate should move to $2.10 per pound according to the purchasing-power-parity theory.

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According to the purchasing-power-parity theory, the exchange rate should adjust to reflect the difference in inflation rates between countries. If the U.S. inflation rate is higher than the U.K. inflation rate, then the U.S. dollar should depreciate relative to the pound. In this case, the exchange rate should move from $2 per pound to $2.10 per pound to reflect the difference in inflation rates.

Assume the Initial Dollar/pound Exchange Rate to Be $2 Per