Question

From 1970 to 1998 the U.S. dollar

a. gained value compared to the Italian lira because inflation was higher in the U.S.
b. lost value compared to the Italian lira because inflation was lower in the U.S.
c. gained value compared to the Italian lira because inflation was lower in the U.S.
d. lost value compared to the Italian lira because inflation was higher in the U.S.

Answer 1

C

Step-by-step explanation:

First remember that inflation is a sustained increase in prices.

If there is a decrease in inflation in one country U.S) but in others don´t (Italy): first, prices (U.S) would drop, which means that imports would decrease. At the same time, exports would be more attractive because of lower prices and they would increase. That would lead to a higher currency (dollar) demand and an appreciation will occur. Appreciation means that, in this case, dollars strengthens in relation to other currencies, in this case: italian Lira.