Suppose, the current value of British pound is pound 1 = $2. Inflation in the United States =
0% and Inflation in Britain = 0%. Now, Inflation in the United States rises to 10%, while
British inflation remains at 0%. As a result, the exchange rate changes to pound 1 = $2.20.
Which of the following is true?
1. Dollar has appreciated and U.S companies will become less competitive
2. Pound has appreciated and British companies will become less competitive
3. Pound has depreciated and British companies become more competitive
4. pound has appreciated, but there is no change in anyone's competitive position