Mark Robert was hired to work at the Federal Reserve to engage in economic activities. He is now working on how to stabilize the exchange rate to ensure that there is no arbitrage opportunity in the currency market. During the meeting, he has to explain several questions.

1. Explain the differences between absolute purchasing power parity and relative purchasing power parity.

2. Assume that the inflation rate in the U.S. is 3% while the inflation rate in Japan is 10%. The current exchange rate for the Japanese Yen is $0.0075. How Japanese Yen should react to the U.S. dollar to make PPP for both U.S. and Japan be the same?

3. What is International Fisher Effect? Explain.

4. Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. The euro's spot exchange rate is $1.40. If the International Fisher Effect (IFE) holds, how Euro will response to the U.S. dollar?