Assume that the nominal interest rate in Mexico is 48% and the interest rate in the United States is 8% for 1-year securities that are free from default risk.

a. What does the IFE suggest about the differential in expected inflation in these two countries? (10 points)

b. Using this information and the PPP theory, what is the expected nominal return to U.S. investors who invest in Mexico? Assume that the real interest rates in Mexico and the United States are 10% and 3%, respectively.