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?

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 Foreign Country) / (1 + Inflation Rate in Home Country). Applying this: 1.20 * (1 + 0.10) / (1 + 0.05) = 1.145.

If the Exchange Rate Between the U