The Law of One Price Assumes That Trade Take Place

question 152

Essay

The law of one price assumes that trade take place at no cost,so that prices across borders equalize.The result of this assumption is that the real interest rate is always constant.
a)Draw a graph to show the demand for dollars in the foreign-currency exchange market under the assumption that purchasing-power parity holds.
b)On the other hand,our model of real exchange rate determination shows a downward sloping demand-for-dollars curve.What could determine how steep or flat the demand for dollars is?

---

Definitions:

Exclusive Right

A legal guarantee that grants an individual or entity sole permission to utilize, produce, or sell a particular product or service.

Patented Item

An item or invention that is legally protected by a patent, granting its inventor exclusive rights to use, make, and sell it for a certain period.

Plant Assets

Long-term tangible assets used in the production of goods or services, typically including buildings, machinery, and equipment.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle, whichever is longer.