Question 3: Suppose Great Britain and Canada produce just one good: beef. Suppose that the price of beef in Canada is $5.25 per pound, and in Britain, it is 3.40 per pound.

a)According to PPP theory, what should the $/ spot exchange rate be?

b)Suppose the price of beef is expected to rise to $5.30 in Canada and to 3.85 in Britain. What should the one-year forward $/ exchange rate be?

c)Given your answers to parts (a) and (b), and given that the current interest rate in Canada is 8 percent, what would you expect the current interest rate to be in Britain?