Currently, you can exchange $ 1 for 0.53 euros. Assume that the average inflatio

Question

Currently, you can exchange $ 1 for 0.53 euros. Assume that the average inflation rate in the U.S over the next 4 years will be 4% annually as compared to 5% in the U.K. Based on relative purchasing power parity you should expect what over the next 4 years.
a. British pound to appreciate against all currencies
b. U.S. dollar to appreciate against the British pound
c. British pound to appreciate against the U.S dollar.
d. U.S. dollar to appreciate against all currencies
e. both the U.S. dollar and the British pound to appreciate against all other currencies.

Explanation / Answer

b. U.S. dollar to appreciate against the British pound

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