The file has the exchange rates for the U.S. dollars against one U.K. pound, the price levels in the U.S. and the U.K. With the data, answer all of the following questions. Note that the exchange rates are in US$1 per 1. Treat the U.S. as the home country.

	Exchange rate US$ per U.K. pound	Price in the U.S.	Price in the U.K
Date	E$/	P$	P

1971-09-01	2.4694	40.8	14.40139733
1972-09-01	2.441	42.1	15.41088435

1. Consider 1 September 1971.

a. According to the purchasing power parity (PPP), what should be the exchange rate between the US dollar and the UK pound, E*$/? (round to 3 decimal places)

b. Calculate the real exchange rate between the U.S. and the U.K, q$/. (round to 3 decimal places)

c. According to the speed of convergence, the deviation from the PPP will shrink by 15% in one year. Calculate expected real exchange rate in 1 year, that is, the expected real exchange rate on 1 September 1972. q e $/,1-year. (round to 3 decimal places)

d. The inflation rates in the U.S. had been 2.5%, while the U.K. inflation rate had been 6.2% per year. Assume that these inflation rates will remain the same all the time. Based on your answer in (b), (c), the speed of convergence together with the inflation rates in the two countries, calculate the expected exchange rate on 1 September 1972, E e $/,1-year. (round to 3 decimal places)