Question: Suppose S 0 $/ = $1.25/ and the 1-year forward rate is F 1 $/ = $1.20/. The real interest rate on a risk-free government

Suppose S₀^$/ = $1.25/ and the 1-year forward rate is F₁^$/ = $1.20/. The real interest rate on a risk-free government security is 2 percent in both England and the United States. The U.S. inflation rate is 5 percent.

a. What is Englands inflation rate if the equilibrium relationships hold.

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