Other things equal, under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely
A) appreciate against foreign currencies.
B) depreciate against foreign currencies.
C) be officially revalued by the government.
D) be officially devalued by the government.

Question

Quizplus · Accepted Answer

Under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the value of the US dollar will increase in relation to the foreign currencies. This is because the lower inflation rate in the US will increase the purchasing power of the dollar relative to the currencies of trading partners, making US goods relatively cheaper and therefore more attractive to foreign buyers, increasing demand for the US dollar.

Other Things Equal, Under Managed Floating Exchange Rates, If the Rate