Question: 1. Suppose that the current exchange rate between the U.S. dollar and the British pound is 1.464$/£. Now further assume that the expected inflation rate in the U.S. for the next year is 2.5% while the expected inflation rate in England is 3%. Considering relative purchasing power parity (PPP), what 1-year forward rate would we expect in terms of $/£? To solve this problem, use the equation from the Suranovic textbook equation for relative PPP in section 30-4. Show your work to receive full credit for this problem.

2. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?

a. Sell dollars for foreign currency

b. Buy dollars with foreign currency

c. Lower interest rates

d. None of the above

3. A wage-price spiral can occur when:

a. there is unemployment and an increase in money supply.

b. there is unemployment and low aggregate demand in the economy.

c. there is full-employment and low aggregate demand in the economy.

d. there is full-employment of resources and an increase in money supply.

e. there is unemployment and a decrease in money demand.

4. Suppose an investor invests in a savings account in England one year ago. At the time of investment, the investor converted $100,000 to pounds at an exchange rate of 1.404$/£. Assume the interest rate in England was 3% and today the investor is converting his/her savings balance (principal plus interest) to dollars when the exchange rate is 1.464$/£. How much money will the investor receive?

1 Sarah has $2,500 that she wants to invest in a European certificate of deposit (CD). The spot exchange rate (dollars per euro) ise$/€=1.13 If the minimum investment required in the CD is €2,000, does Sarah have sufficient funds? If not, what is the shortfall (in Euros)? If so, how much surplus does Sarah have (in euros)?