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4. Problems and Applications Q9 Purchasing-power parity holdsbetween the nations of Ectenia and Wiknam, where the only commodityis Spam. In 2020, a can of Spam cost 4 dollars in Ectenia and 24pesos in Wiknam. The exchange rate between Ectenian dollars andWiknamian pesos was pesos per dollar. Over the next 35 years,inflation is expected to be 2 percent per year in Ectenia and 4percent per year in Wiknam. If this inflation comes to pass, whatwill happen over this period to the price of Spam and the exchangerate? Over this period, the price of Spam in Ectenia will - , andthe price of Spam in Wiknam wil \( \underline{-} \). (Hint: Recallthe rule of 70 from the chapter "The Basic Tools of Finance.") Theexchange rate between the two countries will - will likely have ahigher nominal interest rate. A friend of yours suggests aget-rich-quick scheme: borrow from the nation with the lowernominal interest rate, invest in the nation with the higher nominalinterest rate, and profit from the interest-rate differential.Which of the following statements explains the flaw in yourfriend's logic? The scheme would work only if the real interestrates are the same in both nations. The scheme would work only ifthere is greater inflation in one nation than in the other: Nominalexchange rates adjust for the effects of inflation.

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