Suppose that the exchange rate is 10 Moroccan dirhams per Canadian dollar. Also suppose that you can buy a crate of oranges for 300 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Ottawa for $35. Which statement is consistent with these facts?
A) The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Canada and selling them in Morocco.
B) The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.
C) The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Canada and selling them in Morocco.
D) The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.

Question

Quizplus · Accepted Answer

To determine the real exchange rate, we need to compare the prices of goods in both countries using the exchange rate. In this case, we can convert the price of a crate of oranges in Canada from dollars to dirhams by multiplying $35 by 10, which equals 350 dirhams. This means that the crate of oranges is cheaper in Canada (350 dirhams) than it is in Morocco (300 dirhams). Therefore, arbitrageurs could buy oranges in Morocco for 300 dirhams, sell them in Canada for 350 dirhams, and profit from the price difference. This would increase demand for dirhams and decrease demand for Canadian dollars, causing the exchange rate to adjust until the price of oranges is equalized across both countries. Thus, the real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.

Suppose That the Exchange Rate Is 10 Moroccan Dirhams Per