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The nominal exchange rate is 32 Russian rubles per dollar. The price of a bushel of wheat is 260 rubles in Russia and 7$ in the u.s.
a. What is the real exchange rate? Show work.
b. Can arbitragers make a profit?
c. If your answer to B is yes, where would arbitragers buy and where would they sell.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.

(a) Explain how you could make a profit from this situation. What would be your profit per bushel of rice? If other people exploit the same opportunity, what would happen to the price of rice in Japan and the price of rice in the United States

(b) Suppose that rice is the only commodity in the world. What would happen to the real exchange rate between the United States and Japan?

Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.          

  1. Explain how you could make a profit from this situation. What would be your profit per bushel of rice? If other people exploit the same opportunity, what would happen to the price of rice in Japan and the price of rice in the United States?
  2. Suppose that rice is the only commodity in the world. What would happen to the real exchange rate between the United States and Japan?

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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