4. Money and foreign exchange markets in London and New York are very efficient. The following information is available:

London New York

Spot exchange rate ($/) 1.3860 1.3860

One-year treasury-bill rate 3.8% 4.2%

Expected inflation rate unknown 2%

(a). What do the financial markets suggest for inflation in Europe next year?

(b). Estimate todays one-year forward exchange rate between the dollar and the euro?

(c). Estimate the expected future spot exchange rate one year from now given the above information.