ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian reals is:
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40 pesos per real.
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100 pesos per real.
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25 pesos per real.
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0.4 pesos per real.
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Explanation:
Detailed explanation-1: -$1/€1 → $1.20/€1 means that the dollar has depreciated relative to the euro. It now takes $1.20 to buy one euro, so that the dollar is less valuable. The euro has appreciated relative to the dollar: it is now more valuable.
Detailed explanation-2: -The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should depreciate (the other country’s currency should appreciate).
Detailed explanation-3: -Relative purchasing power parity (RPPP) is an economic theory that states that exchange rates and inflation rates (price levels) in two countries should equal out over time.
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