1. Assuming the same financial market transaction costs and risks, will funds tend to move toward the U.S. or Japan if the U.S. interest rate is 5%, the Japanese interest rate is 2%, and there is a forward discount on the dollar of 2%? How will this effect CIP between the two nations? Explain.
2. Is the forward rate on a currency a good predictor of the future spot rate? Explain.
3. Two economies make only pickles and then trade jars of them. If S > P/P*, how might arbitrage involving jars of pickles lead to the condition of absolute PPP?