Barring any government restrictions, ________ will assure that the exchange rate between two countries will be the same in both countries. The ________ between two countries other than the United States can be inferred from their exchange rates with the U.S. dollar.

Question

Quizplus · Accepted Answer

The concept described in the first sentence is known as riskless arbitrage. The theoretical exchange rate refers to the exchange rate that would exist in a perfectly efficient market without any transaction costs. This is the rate that would make arbitrage impossible and ensure that the exchange rate is the same in both countries. The empirical exchange rate in the second sentence is referring to the spot rate, which is the current exchange rate between two currencies. Therefore, the correct answer is B - riskless arbitrage and theoretical exchange rate.

Barring Any Government Restrictions, ________ Will Assure That the Exchange