Annualized interest rates in the U.S. and Australia are 2% and 9%, respectively. The Australian dollar is worth $0.67.

(a) What is the expected one-year exchange rate under no-arbitrage?

(b) Does approximate UIP predict an appreciation or depreciation of the U.S. dollar? Verify that answer a) is qualitatively correct.

(c) What is the one-year forward rate under no-arbitrage?

(d) Verify that UFR holds.

(e) Assume the inflation rate is 2% in the United States. What is the inflation rate in Australia under no-arbitrage?

(f) Does approximate PPP predict an appreciation or depreciation of the U.S. dollar? Verify that answer f) is consistent with answer b) and answer e).