Two countries, Britain and the U.S. produce just one good, beef. Suppose that the price of beef in U.K. is £2.80 per pound, and in US, it is $3.70 per pound. (6 points)
(a) What should the $/£ spot exchange rate be, according to PPP theory?
(b) Suppose that the price of beef is expected to rise to £3.10 in the U.K. and to $4.65 in the US by the same time next year. What should the one year forward $/£ exchange rate?
(c) Given your answers to parts (a) and (b), and given that current interest rate in U.K. is 10%, what would you expect current U.S. interest rates to be?