4 A selected bundle of goods costs £100 in the UK, and a similar bundle costs 1200 krona (DKR) in Denmark.

People generally expect the rate of inflation to be 5 per cent in the UK and 3 per cent in Denmark.

(a) Assuming that PPP applies, what is the current exchange between GBP and DKR?

(b) Assuming that PPP will continue to hold, what spot exchange rate would you predict for twelve months hence?

(c) Again assuming PPP, what exchange rate should be quoted for three-month forward transactions?