Problem: Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the U.S. is $2.80 per pound and in Britian it is £3.70 per pound. (PLEASE - Do not take this question unless you have provided detailed answers and reasoning for each part)
1) According to PPP theory, what should the $/£ spot exchange rate be?
2) Suppose the price of beef is expected to rise to $3.10 in the United States and to £4.65 in Britain. What should the one-year forward $/£ exchange rate be?
3) Given your answers to parts a and b, and given that the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Britain?