The Law of One Price

question 20

Multiple Choice

The law of one price:

• A) is based on arbitrage.
• B) applies only to real goods and not financial assets.
• C) can explain short-run exchange rates but not long-run exchange rates.
• D) is a mathematical concept that is not useful in explaining exchange rates.

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Definitions:

Competitive Market

A market structure characterized by many buyers and sellers, free entry and exit, and a homogeneous product, leading to price-taking behavior.

Interest Rates

The cost of borrowing money, typically expressed as a percentage of the principal, charged by lenders to borrowers for the use of funds.

Wine Barrels

Containers traditionally made of oak wood, used for aging and storing wine to enhance its flavor and quality.

Exhaustible Resource

A natural resource that has a finite supply and can be depleted by human activities, such as fossil fuels or minerals.