Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam.

a. In 2020, a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos?

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b. Over the next 20 years, inflation is expected to be 3.5 percent per year in Ectenia and 7 percent per year in Wiknam. If this inflation comes to pass, what will the price of Spam and the exchange rate be in 2040? (Hint: Recall the rule of 70 from Chapter 9.)

c. Which of these two nations will likely have a higher nominal interest rate? Why?

d. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Do you see any potential problems with this idea? Explain.


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