Q1) a) Show that when relative PPP (Purchasing Power Parity) holds, r_au= r_eu Note r denotes real interest rate. (1 mark)

b) Assume that worker productivity is expected to increase in European tradables sector in the future. Assume further that worker productivity is expected to stagnate in European nontradables sector as well as in all Australian sectors (tradables and non-tradables) in the future. What implication does this have on the difference between real interest rates in Australia and Europe? (2 marks)

c) Do real interest differences imply unnoticed profit opportunities for international investors? Explain. (2 marks)