Suppose the current spot FX rate is S0 = NOK 0.9600/SEK. The consensus long-term forecast for Norwegian inflation is 4.25% per year, while the long-term forecast for Swedish inflation is 4.10% per year.

6. Which currency do you expect to appreciate? Which currency do you expect to depreciate? Why?

7. Estimate the spot FX rates which will obtain for the next five years. That is, estimate (in NOK/SEK) S1, S2, S3, S4, and S5. (How much confidence do you have in your forecast?)