1. Investors expect inflation rates over the next twelve months in Mexico and Germany to be 10% and 6%, respectively. The current exchange rates for the two currencies are as follows: $.10/MP, $1.1/. What will be the new spot rate at the end of the year if relative PPP holds? Assume Mexico is the home country. Round intermediate steps to four decimals.

		MP9.43/
		MP11.41/
		MP10.60/
		MP8.76/

2. Suppose you observe the following spot rates at the end of the year are as follows: MP8.33/$, $1.35/ . How will this affect Germany's balance of trade according to relative PPP?

		It will increase.
		It will decrease.
		It will remain constant.
		Cannot be determined.