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The law of one price states that the same good manufactured in two different countries should sell for the same price, in the same currency units.

Suppose that the price of U.S. soybeans is currently $6.00 per bushel and the price of European soybeans is currently 4.5 euros per bushel. If the law of one price holds, what is the euro/dollar exchange rate, E (euro/dollar)?

I have

$6=4.5eur

1=4.5eur/$6, = 0.75eur/dollar

This makes since to me but someone is suggesting that the rate is always assumed at 1 euro per dollar amount. So they think the answer is $1.33

Which is correct?

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Related questions

Problem 3

3.1. Suppose quotes for the dollar-euro exchange rate E$=e are as follows: in New York

$1.50 per euro, and in Tokyo $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo.

3.2. What is covered interest rate parity?

3.3. What is uncovered interest rate parity?

3.4. Consider some good g that sells in the U.S. and Europe. What is the relative price of this good?

3.5. What is the law of one price, and if it holds, what should be true about the relative price of good g in (3.4)?

3.6. Consider a basket of goods in the U.S. and Europe. Given these baskets, determine the real exchange rate.

3.7. What is purchasing power parity, and if it holds, what would be true about the real exchange rate in (3.6)?

Economic Questions, if you have time, explain why that's the answer:

7A. Assume the U.S. dollar and the Canadian dollar are traded in flexible currency markets. Which of the following would cause the U.S. dollar to depreciate relative to the Canadian dollar?

A. Higher price level in Canada relative to the United States.

B. Higher interest rates in the United States relative to Canada.

C. Lower interest rates in the United States relative to Canada.

D. Decreasing GDP in the United States than in Canada.

E. Increasing GDP in Canada relative to the United States.

7B. If an exchange rate is said to be floating, that means it is

A, set by the World Bank.

B. set by the government.

C. set by the market forces of supply and demand.

D. set by the International Monetary Fund.

E. set by individual banks.

7C. When the international value of the U.S. dollar increases,

A. Americans pay more for foreign goods.

B. the U.S. trade deficit decreases.

C. U.S. imports decrease.

D. Americans would demand less foreign currency.

E. U.S. exports decrease.

7D. Suppose interest rates fall in the United States, but they don’t fall in other nations. What is the impact on the flow of financial capital, the value of the U.S. dollar, and U.S. net exports (based on the changing value of the dollar)?


Capital Flow / Value of the U.S. dollar / Net Exports

A. Inflow / Appreciate / Increase

B. Inflow / Appreciate / Decrease

C. Outflow / Depreciate / Decrease

D. Outflow / Depreciate / Increase

E. Outflow / Appreciate / Decrease

7E. Which of the following would cause the U.S. dollar (USD) to appreciate as compared to the euro?

A. Interest rates in the United States decrease.

B. American consumers prefer to buy European goods.

C. European consumers boycott American goods.

D. GDP in the European Union decreases.

E. GDP in the European Union increases.

8A.

Which of the following would cause the U.S. dollar (USD) to depreciate as compared to the euro?

A. Interest rates in the United States decrease.

B. Interest rates in the European Union decrease.

C. Price levels in the European Union increase.

D. Price levels in the United States decrease.

E. GDP in the European Union increases.

8B. The U.S. dollar is currently trading for 7 pesos per dollar. If the exchange rate adjusts to 10 pesos per dollar then

A. the U.S. dollar has depreciated.

B. the U.S. dollar has appreciated.

C. the Mexican peso has appreciated.

D. both the Mexican peso and the U.S. dollar have appreciated.

E. both the Mexican peso and the U.S. dollar have depreciated.

8C. Suppose the United States and Brazil sign a free trade agreement. If real interest rates increase in the United States but not in Brazil, which of the following will be true of Brazilian capital flow, exports, and the value of the Brazilian real?

Capital Flow / Exports / Value of Brazilian Real

A.Inflow / Increase / Depreciate.

B. Inflow / Decrease / Appreciate.

C. Outflow / Increase / Appreciate.

D. Outflow / Decrease / Appreciate.

E. Outflow / Increase / Depreciate.

8D. Suppose Europeans began purchasing real assets in the United States. How would this impact the foreign exchange market for the euro and the U.S. dollar price of the euro?

Supply of euro / U.S. dollar Price of euro

A. Increase / Increase

B. Increase / Decrease

C. Decrease / Increase

D. Decrease / Decrease

E. Decrease/ Not Change

9. Suppose U.S. consumers decide they like foreign goods better than they like domestic goods. As a result of this change, which of the following is true?

I. The demand for the U.S. dollar will increase.
II. The demand for the U.S. dollar will decrease.
III. U.S. exports will increase as a result of the changing value of the U.S. dollar.
IV. U.S. exports will decrease as a result of the changing value of the U.S. dollar.

A. I only.

B. I and III only.

C. I and IV only.

D. II and IV only.

E. II and III only.

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

Et = ¥ 110 = $1

Et+1 = ¥ 95 = $1

Current Interest rate in the US = iUS= 8%

If the interest parity condition is expected to hold, interest rates in Japan (iJapan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

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