1.Suppose that the exchange rate between Great British pound and US dollars is 0.78 pounds/dollar. The price index in the United States is 264 and the price index in Britain is 277. What is the real exchange rate between pounds and dollars?

2.In the previous question, if the exchange rate and British price index both doubled, what would happen to the real exchange rate?

3.Suppose you go on vacation to Japan. If purchasing power parity holds, how will the cost of buying goods in Japan compare to the cost in the United States?

4.What do we expect would happen eventually if purchasing power parity does not hold?

5.What are two reasons for why purchasing power parity doesn't always hold?