2. (a) One attraction to economists of the Interest Parity Theory of the determination of equilibrium exchange rates in the spot market lies in the fact that earlier theories of spot market exchange rate determination predicted that spot exchange rates, under flexible exchange rate regimes, would stable over time. Such spot rates have, in fact, proven at various period to be very volatile. The Can. $ - US $ spot rate, since September 2006, is one example. How can the Interest Parity Theory explain such volatility? Discuss. ( b) The Purchasing Power Parity (PPP) Theory and the Interest Parity Theory appear, on the surface, to be radically different. After all, one is a long run, while the other is a short run, theory. There is, nonetheless, a key linkage between the PPP Theory and Interest Parity Theory. Explain the nature of the linkage. 3. If there is, at any given time, a "spot rate" for U.S. dollars being quoted in Canada, e.g. Toronto, there is, at the same time, a "spot rate" for Canadian dollars being quoted in the United States, e.g. New York. What does it mean to say that two aforementioned "spot rates" are "consistent", or "inconsistent", with one another? Normally, the two spot rates show a high degree of "consistency". What forces come into play to eliminate any exchange "inconsistency" that might arise? What, if anything does the question of "consistency" of foreign exchange rates have to do with the Law of One Price? Explain. Arbitrage