Determine will the euro appreciate

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Reference no: EM132072251

Qusetion: You reside in the U.S. and are planning to make a one-year investment in Italy during the next year. Since the investment is denominated in euros, you want to forecast how the euro's value may change against the dollar over the one-year period. You expect that Italy will experience an inflation rate of 3% during the next year, while all other European countries will experience an inflation rate of 7% over the next year. You expect that the U.S. will experience an annual inflation rate of 2% during the next year. You believe that the primary factor that affects any exchange rate is the inflation rate. Based on the information provided in this question, will the euro appreciate, depreciate, or stay at about the same level against the dollar over the next year? Explain.

Reference no: EM132072251

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