Question Four(5 Marks)

a.The current ZAR: BWP spot exchange rate is 0.9800. The expected inflation over the coming year is 2 percent in Botswana and 5 percent in the South Africa. Assume South Africa is your domestic country. According to theexact versionof relative purchasing power parity, what is the expected value of the ZAR: BWP spot exchange rate a year from now?(3 Marks)

The interest rate in South Africa is 4% per annum, the interest rate in Botswana is 1% per annum and the inflation rate in Botswana is 3%. Calculate the real exchange rate in South Africa. (2 Marks)