If the Exchange Rate Between the U

question 254

Multiple Choice

If the exchange rate between the U.S.dollar and the Mexican peso (pesos per dollar) is less than the relative purchasing power between the two countries,which of the following would be true?

• A)There are opportunities for profit by purchasing goods in the United States and then selling them in Mexico.
• B)Purchasing power parity predicts that the value of the dollar will fall as traders take advantage of arbitrage opportunities.
• C)Purchasing power parity predicts that the dollar is overvalued as traders take advantage of arbitrage opportunities.
• D)There are no arbitrage opportunities for which traders can take advantage.

---

Definitions:

Substitute Goods

Products or services that can replace each other in use or consumption, leading to a choice between them based on price, preference, or other factors.

Normal Goods

Goods for which demand increases as the income of the consumer increases, and falls when the consumer's income decreases.

Cross Elasticity of Demand

measures how the quantity demanded of one good responds to a change in the price of another good, indicating substitutes or complements.

Substitute Goods

Products or services that can be used in place of each other because they fulfill similar needs or desires, often influencing the demand and price of goods.