supporse that the cost of a basket of goods purchased by a typical consumer over the course of a week in US is $1000. The cost of a basket of goods purchased by the typical consumer in UK over the course of a week in 1500 pounds. The current exchange rate is 0.5 dollar per pound = 0.5 dollar/pound
1. Identify two disctinct reasons why purchasing power parity might not hold between these two countries.
2. suppose tha the return (in pound) on a UK bond is 5%. The return (in dollar) on an equally risky the US bond is 2%. For both relative PPP and interest rate parity to hold, what must the expected rate of inflastion is UK be if the price level in the US is predicted to rise up to $1050 next year (from $1000 this year)?