(a) Suppose a bottle of orange juice costs 6 pounds in the UK and 12 euros in Italy. If the exchange rate is 0.80 pounds per euro, what is the real exchange rate? Does purchasing power parity theory hold? Explain your answer.

(b) If a country has 50 billion pounds of imports, 65 billion pounds of exports, and 17 billion pounds of domestic assets are sold to foreigners, how many foreign assets are purchased by domestic residents?(10 marks)