1. The UK pound is trading at 1.82 US dollars per UK pound. There is purchasing power parity at this exchange rate. The interest rate in US is 2% a year and the interest rate in the UK is 4% a year.

a) Calculate the US interest rate differential.

b) What is the UK pound expected to be worth in terms of US dollars one year from now?

c) Which country most likely has the lower inflation rate? How can you tell?

2. The table gives some information about a country's international transactions in 2008.

Item

Millions of dollars

Imports of goods and services

1487

Foreign investment in the country

1051

Exports of goods and services

990

Investment abroad

492

Net interest income

7

Net transfers

-68

a) Calculate the current account balance.

b) Calculate the capital account balance.