Suppose the spot rate is A$1.77/GBP. An Audi can be purchased in Sydney, Australia, for A$30,000 or in London, United Kingdom, for 17,860. The real interest rate is 3.5% p.a. for AUD and 15% for GBP.

a) Calculate the real exchange rate of Sydney Audi per London Audi. Is the real exchange rate consistent with the prediction of the absolute PPPExplain

b) Suppose the real interest parity holds, calculate the expected real exchange rate of Sydney Audi per London Audi. Will the change in the real exchange rate lead to an increase in the net exports of Australia? Explain.