If the Law of One Price Holds for All Goods

question 75

Multiple Choice

If the law of one price holds for all goods,

• A)the real exchange rate equals 0.
• B)the real exchange rate equals 1.
• C)the nominal exchange rate equals the real exchange rate.
• D)the ratio of domestic to foreign price levels equals 1.
• E)the nominal exchange rate equals 1.

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Definitions:

Asymmetric Information

A scenario where one participant in a deal possesses greater or more advanced information than the other.

Adverse Selection

A situation where uneven information leads to transactions between parties where one party has more or better information than the other, often seen in insurance markets.

Occur

To happen or take place, referring to events or phenomena.

Adverse Selection

A situation in which one party in a transaction has more information than the other, often leading to an imbalance in which high-risk individuals are more likely to select and benefit from certain agreements, policies, or products.