a) If you believe in the Law of One Price and observe that identical 2kg bags of carrots are selling for 3USD in the US, 5CAD in Canada and 4GBP in UK, calculate USD/GBP and GBP/CAD exchange rated implied by these prices.

b) Using the information from the previous question, find the expected USD/GBP exchange rate next year if annual inflation rates are expected to be 3% in US, 4% in Canada and 5% in UK.