1a. The interest rate on one-year deposits for the US is 7 percent. The spot exchange rate between the English pound and the US dollars is 1.50. In other words, it requires 1.50 dollars to buy one pound. The one-year forward rate is 1.53. You can assume that UIP and relative PPP hold. What does the market expect the US exchange rate relative to the pound sterling over the next year?

A. 1.50

B. 1.47

C. 1.54

D. none of the above

1b. What is the interest rate on one-year deposits in England?

A. 0.07

B. 0.10

C. 0.04

D. none of the above

1c. Suppose that relative PPP always holds. Will inflation be higher in the US or England or will inflation be the same or not have enough information?

A. England

B. The U.S

C. Inflation will be the same

E. We do not have enough information

1d. Will real interest rates be higher in the US or England or will real interest rates be the same or not have enough information?

A. Higher in England

B. Higher U.S

C. Real interest rates will be the same

D. We do not have enough information

1e. What will the inflation rate in England be?

A. 0.04

B. 0.07

C. 0.0

D. We do not have enough information