Assume that the United States faces a 5 percent inflation rate while the U.K has a 7 percent inflation rate.According to the relative PPP,the dollar would be expected to:

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According to the relative Purchasing Power Parity (PPP) theory, if the domestic inflation rate is lower than the foreign inflation rate, the domestic currency is expected to appreciate relative to the foreign currency. In this case, since the U.S. has a lower inflation rate (5%) compared to the U.K. (7%), the dollar is expected to appreciate by the difference in inflation rates, which is 2 percent against the British pound.

Assume That the United States Faces a 5 Percent Inflation