If a dollar buys more potatoes in the U.S. than in France, then
A)the real exchange rate is greater than 1; a profit might be made by buying potatoes in the U.S. and selling them in France.
B)the real exchange rate is greater than 1; a profit might be made by buying potatoes in France. and selling them in the U.S.
C)the real exchange rate is less than 1; a profit might be made by buying potatoes in the U.S. and selling them in France.
D)the real exchange rate is less than 1; a profit might be made by buying potatoes in France and selling them in the U.S.

Question

Quizplus · Accepted Answer

If a dollar buys more potatoes in the U.S. than in France, then the price of potatoes is lower in the U.S. than in France. This means that the exchange rate between the U.S. dollar and the French euro is such that the U.S. dollar is relatively cheaper than the euro. Therefore, the real exchange rate is less than 1, as 1 U.S. dollar buys fewer euros than 1 euro buys dollars. In this case, a profit might be made by buying potatoes in the U.S. with U.S. dollars (which are relatively cheaper) and then selling them in France for euros (which are relatively more expensive). This would result in gaining more euros for each dollar spent, leading to a profit.

If a Dollar Buys More Potatoes in the U