You observe the following current rates: spot exchange rate: AU$3.0 per 1 euro, the (one-year) interest rate on bank deposits in Australia: i($) = 4%, the (one-year) interest rate on bank deposits in Germany: i(euro) = 3%, expected annual inflation rate in Germany: pi(euro) = 2%. Assume that the covered and uncovered interest parities hold, and there are no transaction costs. (a) What is the one-year forward exchange rate, F($/euro), between Australian dollars and euros (using approximation)? (b) What is the expected exchange rate in 1 year, E($/euro), between Australian dollars and euros (using approximation)? (c) Suppose that you know that the exchange rate in one year will be AU$2.0 per 1 euro, and you can make a 1-year forward contract to buy or sell 1 million euros. Explain how you will make profits using the forward market and the spot market in one year without using the spot market today (The answer should have the amount of the profit in one year.). (d) Under the purchasing power parity, what is the expected annual inflation rate in Australia? (e) Under the absolute purchasing power parity, if the price level in Germany is 100 euros today, what is the price level in Australia today? (f) Now suppose that the one-year interest rate on bank deposits in Australia fell to 3%. Explain what will happen to the current spot exchange rate if the forward rate and the German interest rate remain the same. The answer should have the change in demand for or supply of euros in the foreign exchange market, and the new equilibrium spot exchange rate today, E($/euro), using approximation. You observe the following current rates: spot exchange rate: AU$3.0 per 1 euro, the (one-year) interest rate on bank deposits in Australia: i($) = 4%, the (one-year) interest rate on bank deposits in Germany: i(euro) = 3%, expected annual inflation rate in Germany: pi(euro) = 2%. Assume that the covered and uncovered interest parities hold, and there are no transaction costs. (a) What is the one-year forward exchange rate, F($/euro), between Australian dollars and euros (using approximation)? (b) What is the expected exchange rate in 1 year, E($/euro), between Australian dollars and euros (using approximation)? (c) Suppose that you know that the exchange rate in one year will be AU$2.0 per 1 euro, and you can make a 1-year forward contract to buy or sell 1 million euros. Explain how you will make profits using the forward market and the spot market in one year without using the spot market today (The answer should have the amount of the profit in one year.). (d) Under the purchasing power parity, what is the expected annual inflation rate in Australia? (e) Under the absolute purchasing power parity, if the price level in Germany is 100 euros today, what is the price level in Australia today? (f) Now suppose that the one-year interest rate on bank deposits in Australia fell to 3%. Explain what will happen to the current spot exchange rate if the forward rate and the German interest rate remain the same. The answer should have the change in demand for or supply of euros in the foreign exchange market, and the new equilibrium spot exchange rate today, E($/euro), using approximation