Question 3 You are given the following information. The current dollar-pound exchange rate is $1.31 per pound. A representative basket of goods and services costs $100 in the US and $124 (dollars, not pounds!) in the United Kingdom. For the next year, expected inflation is 7% in the U.S. and 6% in the U.K. The speed of convergence to absolute PPP is 35% per year. That is, as an illustrative example of speed of convergence, if the real exchange rate today was hypothetically 1.8 and the speed of convergence to absolute PPP is 30% per year, then the real exchange rate in one year would be 1.8-0.3%0.8=1.56. 1. What is the current U.S. real exchange rate qygs/yx with the United Kingdom? (where qusyuk 1s defined as the ratio of prices in the UK to the US, both expressed in a common currency)? 2. By what percentage is the Pound overvalued or undervalued (in real terms) relative to its absolute PPP level? 3. What do you predict the U.S. real exchange rate with the United Kingdom, qus/vk, will be in one year's time? 4. Using your prediction for the real exchange rate and the inflation rates in each country, what do you predict will be the dollar price of one pound a year from now