What would you expect to occur if the expected rate of inflation in the United States is considerably lower than the expected inflation in Germany?
A) The expected spot rate of €/$ will decrease.
B) The current spot rate of €/$ will increase.
C) The dollar should appreciate against the euro.
D) The dollar should depreciate against the euro.

Question

Quizplus · Accepted Answer

If the expected rate of inflation in the United States is lower than the expected inflation in Germany, the purchasing power of the dollar will be stronger than that of the euro. This would result in an increase in demand for the dollar and a decrease in demand for the euro, causing the dollar to appreciate against the euro. Therefore, choice C is the correct answer.

What Would You Expect to Occur If the Expected Rate