There are two island countries, Truth and Daily Lies. They produce and trade with each other only one product, Conspiracy Theories. Suppose that the price of Conspiracy Theories is 4.50 krona per theory in Truth, and in Daily Lies it is 3.00 dollars per theory.

According to PPP theory, what should the spot exchange rate be for? (test your answer to see if it makes sense)

Ans.1krona=______ dollars Show why:

Suppose the price of Conpiracy Theories is expected to rise to 5.0 krona in Truth and to 4.5 dollars in Daily Lies. What should the one year forward rate be for the two currencies?

Ans. 1krona=_______dollars Show why: