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 of the following is consistent with these facts?
A)The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in the United States 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 the United States.
C)The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in the United States 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 the United States.

Question

Quizplus · Accepted Answer

To determine the real exchange rate, we need to find the ratio of the price of a basket of goods in one country to the price of the same basket of goods in another country. 
Using the given information: 
- Price of a crate of oranges in Rabat = 300 MAD. 
- Price of a crate of oranges in Ottawa = $35 CAD. 
Converting the price of the crate of oranges in Ottawa to MAD: 
$35 CAD * 10 MAD/CAD = 350 MAD 
Thus, the real exchange rate is 350 MAD/300 MAD = 1.167. 
This means that the dirham is undervalued compared to the Canadian dollar. 
Arbitrageurs could profit by buying the crate of oranges in Morocco for 300 MAD, selling them for 350 MAD in Canada, and making a profit of 50 MAD per crate. Therefore, choice B is correct.

Suppose That the Exchange Rate Is 10 Moroccan Dirhams Per