a) Show that when relative PPP holds, rAU = rEU . Note: r denotes real interest rate.

b) Assume that worker productivity is expected to increase in European tradable sector in the future. Assume further that worker productivity is expected to stagnate in European non-tradables sector as well as in all Australian sectors (tradable and non-tradables) in the future. What implication does this have on the difference between real interest rates in Australia and Europe?

c) Do real interest differences imply unnoticed profit opportunities for international investors? Explain.