Question: We have two countries that are engaging in commerce who are concerned about fluctuations in each other's currency. Looking at inflation rates, the USA is

We have two countries that are engaging in commerce who are concerned about fluctuations in each other's currency. Looking at inflation rates, the USA is expecting to have moderate inflation levels at a rate of 3.5% over the course of the next 12 months. The other country involved, Italy, is likely to experience high inflation rates (5.25%) over the next twelve months.

Pretend for a moment that the current spot exchange rate is $1.497. What do you anticipate the spot rate will change to at the end of the twelve month period?

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