If the inflation rate in the United States is greater than the inflation rate in Britain, other things held constant, the British pound will
A) Depreciate against the U.S.dollar.
B) Remain unchanged against the U.S.dollar.
C) Appreciate against other major currencies.
D) Appreciate against the dollar and other major currencies.
E) Appreciate against the U.S.dollar.

Question

Quizplus · Accepted Answer

When the inflation rate in the United States is higher than in Britain, it generally means that goods and services in the U.S. become relatively more expensive compared to those in Britain. As a result, the demand for British pounds increases (for buying relatively cheaper British goods and services) while the demand for U.S. dollars decreases. This leads to the appreciation of the British pound against the U.S. dollar.

If the Inflation Rate in the United States Is Greater