1. Consider two countries, the US and Mexico, and two sector, tradeables and nontrade- ables. Productivity (TFP) in tradeables is Ar in the US and A in Mexico, whereas productivity (TFP) in nontradeables in ANT in the US and App in Mexico. The share of tradeables in spending, 7, is equal to 0.5. Use the Balassa-Samuelson model we studied in class to answer the following questions. (a) Compute the price level of Mexico relative to the US if AT = 2At and ANT = ANT. (b) Compute the price level of Mexico relative to the US if AT = At and ANT = ANT. (c) What will happen to the Mexican price level relative to the US price level when the technological gap between both countries narrows? 2. Expected inflation for the next 12 months is 35.8% (0.35) in Argentina and 1.2% (0.012) in the US. For this question assume that PPP holds. (a) What is the expected depreciation of the Argentine Peso (ARS) relative to the US dollar (USD) over the next 12 months? Use an equation to answer this question. Give a numerical answer. (b) The current exchange rate of the Argentine Peso (ARS) to the US dollar (USD) is 84.9 ARS/USD. What is the expected exchange rate ARS/USD 12 months from now? Give a numerical answer. 1