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March 26, 2017

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True of False?
E=exchange rate

Suppose E $/euros = 3/2 and E $/pounds = 2, and there is no trade friction, the no arbitrage condition implies
that E pounds/euros = 2

  • econ - ,

    False. Think it through.
    You have $/euros = 3/2 which means $3 = 2E. Also, you have 2E=1L. Ergo, $3=1L.

  • econ - ,

    so the arbitrage condition should be E pounds/euros=3/4. ( i got this by multiplying 1/2 and 3/2 )

    Is this correct?

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