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Right now, the US dollar is relatively close in value to the euro ($1.10 = 1...

Right now, the US dollar is relatively close in value to the euro ($1.10 = 1 e). There is some speculation that we may be seeing some inflation in the United States in the near future. If the rate of inflation stays the same in the European Union and increases in the US, what can we expect will happen to the exchange rate between the Euro and the US dollar? Moreover, suppose that central banks neither in the United States nor in Europe change their current monetary policies. Use the material from class to support your explanation.

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Answer #1

SOLUTION:-

* If the ratio of inflation increases in the United States and stays the same in Europe, then demand foe U.S.

* Exports will decline and thus demand for U.S.

* Dollar will decrease and this leftward shift in the demand for dollars will lead to depreciation of the US. currency.

* Thus, if the rate of inflation stays the same in European Union and increase in the US, then we can expect dollar to depreciate vis-a-vis Euro.

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