2. Two countries, Canada and the United States, produce just one good: beef. Suppose the price of beef in the United States is $3 per kilogram and in Canada it is $4 per kilogram.

a. According to the PPP theory, what should the spot exchange rate be?

b. Suppose the price of beef is expected to rise to $3.50 per kilogram in the United States and to

$4.75 per kilogram in Canada. What should the one-year forward US$/CAD$ exchange rate be?

c. Given your answers to parts a and

b, if the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Canada?