In the Taylor rule framework, the euro will appreciate against the U.S. dollar if:

A. there is an increase in the inflation gap in the euro area relative to the inflation gap in the U.S.
B. the inflation rate in the euro area is higher than the inflation rate in the U.S.
C. the ECB's target inflation rate is higher than the Fed's target inflation rate.

Correct Answer: A

It's the relative inflation gap, not absolute inflation level, that matters in the Taylor rule framework.