Assume that Australian iron ore sells for $55 a tonne, Chinese iron ore sells for 430RMB (yuan), and the nominal exchange rate is 8RMB (yuan) per dollar.

a) Calculate and explain how you could make a profit from this scenario.

b) If other people exploit the same opportunity (as in part (a)), what should happen to the

price of iron ore in China and in Australia?

c) Suppose that iron ore is the only commodity in the world. What would happen to the

real exchange rate between Australia and China?

d) What factors could prevent the real exchange rate from adjusting in the scenario discussed in parts (a) to (c)?

e) Explain what would happen to the exchange rate (discussed in parts (a) to (d) if the Reserve Bank of Australia (central bank) started printing large quantities of Australian Dollars.