Question: The US inflation rate is expected to be 4.5% for the next five years, and the UK inflation rate is expected to be 2.5% per

The US inflation rate is expected to be 4.5% for the next five years, and the UK inflation rate is expected to be 2.5% per year. The US 5-year interest rate is 4.5% and the UK 5-year interest rate is 2%.

a)Using relative PPP find the expected $/pound exchange rate five years from today.

b)Using the intentional Fisher Effect find the expected $/pounds exchange rate five years from today.

c)Why are the answers are different.

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