Two countries, the United States and Australia, produce just one good, wheat. Suppose the price of wheat in the U.S. is US$2.80 per bushel and in Australia is A$ 3.70 per bushel.

1. According to purchasing power parity, what should be the US/Australian dollar spot rate of exchange?

2. Suppose the price of wheat over the next year is expected to rise to US$3.10 in the United States and to A$4.65 in Australia. What should be the one-year forward US/Australian dollar exchange rate?

3. Given your answer to (a) and (b), and given the current interest rate in the United States is 10% for treasury notes of a one-year maturity, what would you expect current Australian interest rate to be?

1. Find current spot rate using wheat prices.

2. Find forward rate using wheat prices a year later.

3. AppliesInterestRateParity.