2. Two countries, the United States and the United Kingdom, 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 the United Kingdom, what is the maximum possible change in the spot exchange rate that could occur?