1. If investors in the United States and Mexico require the same real interest rate, and the nominal rate of interest is 3 percent higher in Mexico, what does this imply about expectations of U.S. inflation and Mexican inflation? What do these inflationary expectations suggest about future exchange rates? (5 points)

2. Assume that St = 1.30 GBPUSD. How will this spot rate adjust after one year according to PPP if the United Kingdom experiences an inflation rate of 2% while the U.S. experiences an inflation rate of 1%? (6 points)

3. Assume that the spot exchange rate of the South African rand (ZAR) is USD .06. The 180-day interest rate (annualized) is 1% in the United States and 6% in South Africa. What will the spot rate ZARUSD be in 6 months, according to the IFE? (You may use the approximate formula to answer this question.) (6 points)