Use the money market with the general monetary model and foreign exchange (FX) market to answer the following questions. The questions consider the relationship between the U.K. pound () and the Australian dollar ($). Let the exchange rate be defined as Australian dollars per pound, E_$/. In the U.K., the real income (Y) is 2.00 trill., the money supply (M) is 1.00 trill., the price level (P) is 1.00, and the nominal interest rate (i) is 4.00% per annum. In Australia, the real income (Y_$) is 1.00 trill., the money supply (M_$) is AU$0.75 trill., the price level (P_$) is AU$1.50, and the nominal interest rate (i_$) is 4.00% per annum. These two countries have maintained these long-run levels. Note that the uncovered interest parity holds all the time and the purchasing power parity holds only in the long-run. Assume that the new long-run levels are achieved within 1 year from any permanent changes in the economies.

1. Now, consider time T when the U.K. real income falls permanently by 10% unexpectedly so that the new real income in the U.K. becomes Y = 1.8 trill. With the new real income, the interest rate in the U.K. falls to 2% per annum today. Assume that Australia and the U.K. use the floating exchange rate system.

(a) Calculate the U.K. price level in 1 year (the new long-run price level in the U.K. at T+1), P^e (round to 3 decimal places).

(b) Calculate the expected exchange rate in 1 year (the new long-run exchange rate at T+1), E^e_$/ (round to three decimal places).

(c) Calculate the exchange rate today, E_$/ (round to three decimal places).