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Imagine that you here that the expectation for the next year is that the U.S. dollar...

Imagine that you here that the expectation for the next year is that the U.S. dollar is going to strengthen against the Euro over the next five to ten years.   You believe in the theory of purchasing power parity, having this in mind explain whether you expect inflation in the United States to be higher or lower on average compared with that in the Euro zone over the abovementioned period.

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Expert Solution

Purchasing power parity assumes that price level between two countries should be equal.
If US dollar is going to strengthen against Euro, then inflation will surge in United States.
When US dollar is comparatively stronger than before, people in US will require less money to purchase commodities from countries where Euro is prevalent. Hence, the outflow of US dollars will be low. When people in US have more dollars in hand, currency will change hands more frequently which will lead to inflation.

jeff jeffy answered 2 years ago
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