1.In this course, we used two versions of theinterest parity condition, the exact one and the approximate one. Using ANY one of those two versions along with the May 1^st, 2020 dollar-to-pound exchange rate (see the previous page), answer the following two questions:

a. If twelve-month certificates of deposit (CD) issued by British banks currently yield 2.5% annually while dollar-denominated twelve-month CDs issued by U.S. banks yield 1.5%, what 12-month forward exchange rate between the pound and the dollar is required for theinterest parity conditionto hold? Show your work. (E_GBP/USD= 0.7994)

b. Does your work in the previous question suggest the market expects the British pound to appreciate or depreciate? Explain briefly.

2.

In 2017, the U.S. Congress voted to approve the tax cut proposed by the Trump administration. Carefully explain how that policy change affectedthe U.S. balance of trade.