Suppose that the price of a bottle of wine is €25 in Paris, and the wine...

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Suppose that the price of a bottle of wine is €25 in Paris, and the wine...

Suppose that the price of a bottle of wine is €25 in Paris, and the wine is sold at $40 in New York. What will be the exchange rate if the law of one price holds?

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Answer 1

Answer #1

If law of one price holds then price of good throughout the world should be equal

So price of wine bottle in newyork shall be equal to Paris

So exchange rate = price in newyork/price in Paris

= 40/25 = 1.6$/€

And 0.8620€/$

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Answer 2

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