Two countries, the United States and Australia, produce only one good, wheat. Suppose the price of...

 

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Two countries, the United States and Australia, produce only one good, wheat. Suppose the price of wheat per bushel is US$6.76 in the United States and is AU$11.82 in Australia. The current exchange rate of the Australian dollar (AUS) in terms of the US$ is 0.7714. (6 points)+ a) Is the law of one price (LOP) satisfied or violated? Explain and show your work. (1 point) b) In part a), if the LOP is violated, explain what will happen? What is the direction of arbitrage and what is the per unit arbitrage profit? (1 points) c) What is the exchange rate compatible with the LOP? Show your work. (0.5 point) d) Based on your answer in part c), which currency is overvalued and which is undervalued and by how much? (3 point) Two countries, the United States and Australia, produce only one good, wheat. Suppose the price of wheat per bushel is US$6.76 in the United States and is AU$11.82 in Australia. The current exchange rate of the Australian dollar (AUS) in terms of the US$ is 0.7714. (6 points)+ a) Is the law of one price (LOP) satisfied or violated? Explain and show your work. (1 point) b) In part a), if the LOP is violated, explain what will happen? What is the direction of arbitrage and what is the per unit arbitrage profit? (1 points) c) What is the exchange rate compatible with the LOP? Show your work. (0.5 point) d) Based on your answer in part c), which currency is overvalued and which is undervalued and by how much? (3 point)

Answer rating: 100% (QA)

1 2 3 4 5 6 7 a 8 9 10 11 b 12 13 14 15 16 c 17 18 d 19 A Price in US US ... View the full answer