Assuming inflation rates in the U.S. and Switzerland are 5% and 3% respectively. Spot exchange rate of Swiss francs is US$1.05. Purchasing Power Parity (PPP) and international Fisher effect (IFE) are held in this case.

Required:

1. (a) Calculate the expected percentage change of spot exchange rate of Swiss francs.

2. (b) Calculate the U.S. interest rate if interest rate in Switzerland is 3.5%.

3. (c) If PPP is held, IFE is held too. Explain whether this statement is correct.