The practice of buying a foreign currency with one currency then reselling it to buy yet another currency
A) creates disequilibrium in the foreign exchange market
B) is illegal in the U.S.
C) is arbitrage
D) is impossible because the foreign exchange market creates general equilibrium among exchange rates
E) leads to mutually inconsistent exchange rates

Question

Quizplus · Accepted Answer

Arbitrage involves buying and selling assets, in this case, currencies, in different markets to take advantage of differing prices for the same asset. It does not necessarily create disequilibrium, is not illegal, and does not imply that exchange rates are mutually inconsistent or that general equilibrium is disrupted.

The Practice of Buying a Foreign Currency with One Currency