A roll of duct tape costs 3 Canadian dollars in Canada and 2 U.S.dollars in the U.S.The nominal exchange rate is 1.25 Canadian dollars per U.S.dollar.

Question

Quizplus · Accepted Answer

If duct tape is bought in the U.S. for 2 U.S. dollars and sold in Canada for 1.25 Canadian dollars per U.S. dollar, then the seller would receive 2.5 Canadian dollars. Since the cost of a roll of duct tape in Canada is 3 Canadian dollars, there would be no demand for Canadian duct tape. This would tend to decrease the price of Canadian duct tape, rather than drive it up. On the other hand, the demand for U.S. duct tape would increase, driving up its price.

A Roll of Duct Tape Costs 3 Canadian Dollars in Canada