Question 1

If the nominal exchange rate, E = $/, does not change, and the UK's price level has increased relative to the US's price level by 10%, then which is correct:

(a) Goods in the UK become more competitive than those in the US

(b) The real exchange rate has increased for the UK

(c) All of the answers here are incorrect

(d) The real exchange rate has decreased for the UK

(e) The real exchange rate for the UK remains unchanged

Question 2

If the interest rate in Australia is 4.5%, the interest rate in the US is 2.5%, and the Australian dollar is expected to depreciate by 2.5%, what is the expected gain by holding Australian bond?