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  3. a) show that when relative ppp holds, r(au) = r(eu

a) Show that when relative PPP holds, r(au) = r(eu). Note: r denotes real interest rate. b)...

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Economics

a) Show that when relative PPP holds, r(au) = r(eu). Note: rdenotes real interest rate.

b) Assume that worker productivity is expected to increase inEuropean tradables sector in the future. Assume further that workerproductivity is expected to stagnate in European nontradablessector as well as in all Australian sectors (tradables andnon-tradables) in the future. What implication does this have onthe difference between real interest rates in Australia andEurope?

c) Do real interest differences imply unnoticed profitopportunities for international investors? Explain.

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