1. Suppose that the average price of goods imported from Great Britain increased. Is it likely that the value of the Australian dollar would appreciate or depreciate versus the British pound, ceteris paribus? Is it likely that the average price in British pounds of goods exported from Australia to Great Britain would rise or fall?
2. Suppose that Australia's price level is 125, the British price level is 100, and the nominal exchange rate of pounds to the dollar is £0.60 = $1. Calculate the real exchange rate of pounds to the dollar. Show all workings.
3. Explain how the CPI is constructed, and discuss any weaknesses with this measurement technique.