Suppose that the U.S. dollar buys 100 Japanese yen. Gold costs $500 per ounce in New York and 20,000 yen per ounce in Tokyo. What does the law of one price predict will happen?
A) Nothing will happen.
B) Traders will avoid the U.S. market and exchange only in Tokyo, where the price of gold is lower.
C) Traders will buy gold in the United States and sell it in Japan.
D) Traders will buy gold in Japan and sell it in the United States.

Question

Quizplus · Accepted Answer

The law of one price suggests that traders will exploit price differences. Since gold is cheaper in Japan (20,000 yen = $200) compared to the U.S. ($500), traders will buy gold in Japan and sell it in the U.S. for profit.

Suppose That the U