Suppose that the euro has appreciated against most other currencies (U.S. dollar, Japanese yen, Chinese reminbi, Britiish pound, Swiss franc).

Why would an appreciation of the euro have an impact on inflation in the eurozone?

a) Thanks to a stronger euro, foreign-made goods are now cheaper than locally-made ones. This will lead to lower prices in the eurozone as locals will have to reduce their prices to compete.

b) Imports will lead to a wave of European firms bankruptcies which will result in higher prices as competition is reduced.

c) The economic recovery after the effects of the pandemic are over, will lead to an increase in economic activity which will lead to higher prices (higher inflation).

d) If prices continue to rise, the ECB would institute price controls or quotas on imports from countries outside the eurozone. This will increase inflation.