Assume that American rise sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.

A.Explain how you could make a profit from this situation. What would be your profit per bushel of rice? If other people exploit the same opportunity, what would happen to the price of the rice in Japan and the price of rice in the United States?

B.Suppose that rice is only commodity in the world what would happen to the real exchange rate between the United States and Japan?

Econ

A. To make a profit from this situation, you would have to take advantage of the exchange rate difference between the United States and Japan. Here's how you could do it:

1. Convert your American dollars to Japanese yen: Since the nominal exchange rate is 80 yen per dollar, you would convert your $100 to yen by multiplying it with the exchange rate: $100 * 80 yen/dollar = 8,000 yen.

2. Buy Japanese rice with the converted yen: With your 8,000 yen, you would purchase Japanese rice in Japan at a rate of 16,000 yen per bushel.

3. Sell the Japanese rice back in the United States: Once you have the Japanese rice, you can sell it in the United States for $100 per bushel.

Profit per bushel of rice: The profit per bushel of rice would be the difference between the initial cost of purchasing the rice in Japan and the amount received from selling it in the United States. In this case, the profit would be $100 - $100 = $0 per bushel of rice.

If other people also exploit the same opportunity, the increased demand for Japanese rice from buyers looking to profit would drive up the price of rice in Japan. Simultaneously, the increased supply of American rice being sold in the United States would put downward pressure on the price of rice there.

B. If rice were the only commodity in the world, the real exchange rate between the United States and Japan would depend on the relative productivity of rice production in each country. The real exchange rate reflects the prices of goods and services in different economies, adjusted for changes in the purchasing power of currencies.

In this scenario, the real exchange rate between the United States and Japan would be determined solely by the efficiency and productivity of rice production in each country. If one country becomes more efficient in producing rice, its currency would appreciate in real terms compared to the other country's currency. On the other hand, if productivity in one country declines relative to the other, its currency would depreciate in real terms.

Basically, the real exchange rate would reflect the changes in the relative competitiveness of rice production between the United States and Japan.