Two countries, the United States and England, produce only one good, wheat. Suppose the price of wheat is $3.25 in the United States and is £1.35 in England.
a. According to the law of one price, what should the $:£ spot exchange rate be?
b. Suppose the price of wheat over the next year is expected to rise to $3.50 in the United States and to £1.60 in England. What should the one-year $:£ forward rate be?
c. If the U.S. government imposes a tariff of $0.50 per bushel on wheat imported from England, what is the maximum possible change in the spot exchange rate that could occur?