If expected inflation drops in Europe, so that interest rates fall there, what will happen to the exchange rate on the U.S. dollar?
The US dollar will depreciate and therefore the value of rate of exchange falls. the autumn in expected inflation in Europe ends up in a fall within the charge per unit and which create a decline within the relative expected return on dollar assets. The expected euro appreciates and it'll be greater than the decline within the foreign rate. thanks to the decline within the relative expected return on dollar assets make a leftward shift of the demand curve, and therefore the equilibrium U.S. dollar charge per unit falls.

As the value of the US dollar declines, so does the exchange rate. The fall in predicted inflation in Europe results in a decrease in the unit cost, which lowers the relative expected return on dollar assets. The predicted increase in the euro's value will be bigger than the decrease in the exchange rate. Due to the leftward shift of the demand curve caused by the loss in the relative expected return on dollar assets, the equilibrium U.S. dollar charge per unit decreases.

What do you mean by inflation?

Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy.

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