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Suppose the expected annual inflation rate in the United Kingdom is 2.5 percent and that in the United States is 2 percent. The current spot rate is $1.5050/£.

            (a) What is the expected one-year PPP spot rate? 

(b) What is the expected percent appreciation/depreciation of the British Pound?

 

(c) If the spot rate turns out to be $1.51/£ next year, how would you describe the real exchange rate of the British pound? Dollar? Increase or decrease?

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