3. Suppose that two countries, Brazil and Mexico, produce bananas. Brazil uses the real, Mexico uses the peso. In Mexico, bananas sell for 10 pesos per pound of bananas. The exchange rate is 0.5 reals per peso, Ereals/pesos : 0. 5. The pesmdollar exchange rate is Epesos/$ : 10. a. If LOOP holds, what is the price of bananas in Brazil? What is the price in the United States? b. Suppose the price of bananas in Brazil is 5. 5 reals per pound. At the same time, the price of bananas in the United States is $1. 00 per pound. Based on this information, where does LOOP hold? c. How will banana traders respond to the previous situation? In which markets will traders buy bananas? Where will they sell them? What will happen to the prices of bananas in Mexico, Brazil, and the United States? Useful Formulas: EHIF - EHIF Fe qHIF = (EHIFPF )/ PH PH i = i* EHIF= =1F + + LH PF EHIF E FA = CA + KA S =I+ CA S = Spts g Change in External Wealth = AW = CA + KA + Valuation Effects Change in Domestic Wealth = AWD = I + Capital Gains on K PV(Q) = PV(C) + PV(I) AQ PV(Q) = 0+2 MPK 27* AK