Answer this question:

b. Consider a world where there are only two countries: your home country and a foreign country. In addition, consider any of the following 10 scenarios for the exchange rate HC/FC and consumption baskets in the home country and the foreign country, both denominated in their corresponding local currency. Then: Scenarios 52 53 $5 S6 58 59 $10 Spot rate in 6 months 0.7 0.8 0.9 1.1 1.2 1.3 1.4 1.5 1.6 Home country basket 100 105 110 115 20 125 130 135 140 145 Foreign country basket 50 45 40 35 30 25 20 15 10 5 REQUIRED: i. Define what the real exchange rate (RER) is. Then, compute and report the RERs for the 10 different scenarios. Approximate your solution to 3 decimal places. [10 marks] Based on the RERs that you obtained in the previous part, discuss which country is more expensive from the perspective of a citizen of your home country. [5 marks] iii. Briefly explain why the value of the foreign country's consumption basket decreases with the spot rate? [5 marks] iv . Discuss what a RER greater than one implies and how the law of one price should affect markets so that the RER converges to one. [5 marks]