The law of one price:
A) is based on arbitrage.
B) applies only to real goods and not financial assets.
C) can explain short-run exchange rates but not long-run exchange rates.
D) is a mathematical concept that is not useful in explaining exchange rates.

Question

Quizplus · Accepted Answer

The law of one price is based on arbitrage, which involves taking advantage of price differences between identical assets in different markets to make a profit. In the context of exchange rates, the law of one price suggests that identical goods should have the same price in different countries, and any deviations from this should be corrected through arbitrage.

The Law of One Price