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1) Assume that the 1-year inflation rate in UK is 5.00%, while the 1-year inflation rate in the U.S. is 3.00%. The current spot rate is Pound 0.8/$. If the Purchasing Power Parity holds, the UK Pound/\$ exchange rate in about a year's time will be Ans: Pound 0.8155/$ 2) Assume that the 1-year inflation rate in UK is 5.00%, while the 1-year inflation rate in the U.S. is 3.00%. If the Purchasing Power Parity holds, the UK Pound is expected to against the USD. Ans: Weaken (depreciate) 3) Assume that the 1-year inflation rate in UK is 3.00\%, while the 1-year inflation rate in the U.S. is 5.00%. The current spot rate is $1.35/ Pound. If the Purchasing Power Parity holds, the UK Pound/\$ exchange rate in about a year's time will be Ans: \$1.3762/Pound