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# Using the PPP theory on the price of beef in Great Britain & the United States

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Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the U.S. is \$2.80 per pound and in Britian it is Â£3.70 per pound. (PLEASE - Do not take this question unless you have provided detailed answers and reasoning for each part)

A) According to PPP theory, what should the \$/Â£ spot exchange rate be?

B) Suppose the price of beef is expected to rise to \$3.10 in the United States and to Â£4.65 in Britain. What should the one-year forward \$/Â£ exchange rate be?

C) Given your answers to parts a and b, and given that the current interest rate in the United States is 10 percent, what would you expect the current interest rate to be in Britain?

#### Solution Preview

Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the U.S. is \$2.80 per pound and in Britian it is Â£3.70 per pound. (PLEASE - Do not take this question unless you have provided detailed answers and reasoning for each part)

A) According to PPP theory, what should the \$/Â£ spot exchange rate be?
According to PPP
\$/Â£ spot exchnage rate = ...

#### Solution Summary

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\$2.49