If the US Inflation Rate Is Expected to Be 3 Percent Next

question 19

Multiple Choice

If the U.S. inflation rate is expected to be 3 percent next year, the European inflation rate is expected to be 4% next year, and the spot rate between the euro and dollar is $1.30, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30 to __________.

• A) appreciate, $1.2875
• B) appreciate, $1.3126
• C) depreciate, $1.2875
• D) depreciate, $1.3126

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