Question 2: You are given the following information. The current dollar-pound exchange rate is $2 per pound. A representative basket of goods and services costs $100 in the US and $120 (dollars, not pounds) in the United Kingdom. For the next year, the Fed is predicted to keep U.S. inflation at 2%, and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 20% per year. That is, if the real exchange rate today is 1.4 and the speed of convergence to absolute PPP is 20% per year, the real exchange rate in one year will be 1.4-0.20*0.4=1.32. 1. What is the expected U.S. minus U.K. inflation differential for the coming year? 2. What is the current U.S. real exchange rate qus/UK with the United Kingdom? (recall that qusjuk is defined as the ratio of prices in the UK to the US, both expressed in a common currency). 3. By what percentage is the dollar overvalued or undervalued relative to its absolute PPP level 4. What do you predict the U.S. real exchange rate with the United Kingdom will be in one year's time? 5. What is the expected rate of real depreciation for the United States (versus the United Kingdom)? 6. What is the expected rate of nominal depreciation for the United States (versus the United Kingdom)? 7. What do you predict will be the dollar price of one pound a year from now? Question 2: You are given the following information. The current dollar-pound exchange rate is $2 per pound. A representative basket of goods and services costs $100 in the US and $120 (dollars, not pounds) in the United Kingdom. For the next year, the Fed is predicted to keep U.S. inflation at 2%, and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 20% per year. That is, if the real exchange rate today is 1.4 and the speed of convergence to absolute PPP is 20% per year, the real exchange rate in one year will be 1.4-0.20*0.4=1.32. 1. What is the expected U.S. minus U.K. inflation differential for the coming year? 2. What is the current U.S. real exchange rate qus/UK with the United Kingdom? (recall that qusjuk is defined as the ratio of prices in the UK to the US, both expressed in a common currency). 3. By what percentage is the dollar overvalued or undervalued relative to its absolute PPP level 4. What do you predict the U.S. real exchange rate with the United Kingdom will be in one year's time? 5. What is the expected rate of real depreciation for the United States (versus the United Kingdom)? 6. What is the expected rate of nominal depreciation for the United States (versus the United Kingdom)? 7. What do you predict will be the dollar price of one pound a year from now