The annual inflation rate in the US is expected to be 6%, while it is expected to be 2.5% in Australia. The current spot rate(on 10/07/18) for the Australian Dollar (AD) is $0.85.

Required

i) According to Purchasing Power Parity, estimate the expected percenatage change in the value of the AD during a one-year period and calculate its AD expected values at 10/07/19.

ii) Suppose the value of the AD turned out to be $0.865 on 10/07/18, what is the real exchange? Which currency has experienced gain(how much) and which a loss (how much), in real purchasing power during the period?

iii) If the real rate of interest is expected to be 3% both in the US and Australia, use the Fisher model to calculate the nominal rates of interest in USA and in Australia.