Inflation in             Inflation in            Average

                                            Prices of                Prices of              Overall

                                         Traded Goods    Nontraded Goods      Inflation

         Mexico                         4%                       12%                      8%

        United States                2%                         2%                      2%

a. Based on the information above, we can expect that over the next twenty years, the average annual percentage change in the peso per dollar exchange rate will be ______.

b. Real exchange rates are used to identify the portion of a change in a nominal exchange rate that cannot be accounted for by a difference in the countries’ overall rates of inflation. Suppose that the real exchange rate in this problem is measured as the price of all U.S. goods (traded and non traded) relative to, or divided by, the price of all Mexican goods (traded and non traded). Then what would you expect the average annual percentage change in the real exchange rate to be? ______.