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

If the inflation rate in the United States is higher than that of Britain, then the purchasing power of the dollar decreases, making British goods relatively less expensive to buy. Therefore, there will be an increase in demand for British goods and services, which will cause an increase in demand for the British pound. As a result, the British pound will appreciate against the U.S. dollar.

If the Inflation Rate in the United States Is Greater