1. Suppose the price level in the US is $12,500 and in the UK it is GBP 9,500. If current interest rates in the UK is 4% and in the US it is 2.5%. What does the asset model predict will be the dollar pound spot rate?
2. Suppose the Mexican peso British pound exchange rate is currently at 22, and short run interest rates in the UK is 2%. Explain (and compute) what will happen to the spot peso-pound exchange rate if the future pound-peso rate remains 0.04 and the Mexican interest rates is cut by 5%.
3. In the preceding question, the short run interest rate in Mexico was changed and we assumed that the future exchange rate remained the same. Provide a plausible explanation why that might be the case.