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) 1.050
B) 0.8730
C) 1.257
D) 0.7955

Question

Quizplus · Accepted Answer

The exchange rate adjustment can be calculated considering the inflation rates in both regions. If the U.S. has a lower inflation rate (5%) compared to Europe (10%), the value of the Euro in terms of dollars will increase because the Euro is depreciating faster due to higher inflation. The new exchange rate can be calculated as $1.20 * (1 + 10%) / (1 + 5%) = $1.20 * 1.10 / 1.05 = $1.257.

If the Exchange Rate Between the U