If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries,which of the following would be true?

Question

Quizplus · Accepted Answer

If the exchange rate is greater than the relative purchasing power, it means that goods in India are relatively cheaper than in the United States. Traders can take advantage of this difference by purchasing goods in India at a lower price and selling them in the United States at a higher price, thereby making a profit. This is known as arbitrage. Therefore, option A is the correct choice. Option B is incorrect because purchasing power parity predicts that exchange rates will adjust to equalize the purchasing power of currencies, not the other way around. Option C is also incorrect because it assumes that the dollar is undervalued, which may not necessarily be the case. Option D is incorrect because there are indeed arbitrage opportunities in this scenario.

If the Exchange Rate Between the U