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Spot rate

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1. Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate
adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent
while the United States experiences an inflation rate of 2 percent?

2. Assume that the spot exchange rate of the Singapore dollar is $.70. The one?year interest
rate is 11 percent in the United States and 7 percent in Singapore. What will the spot rate
be in one year according to the IFE? (You may use the approximate formula to answer
this question.)

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