If the exchange rate between the U.S.dollar and the Mexican peso (pesos per dollar)is less 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 lower than the relative purchasing power, it means that goods are cheaper in the United States compared to Mexico. This creates an opportunity for profit by purchasing goods in the United States at the lower price and then selling them in Mexico at a higher price, taking advantage of the price difference. This is known as arbitrage, and option A correctly identifies this opportunity. Option B and C are incorrect as they contradict each other, and the value of the dollar does not necessarily have to fall or be overvalued in this scenario. Option D is incorrect as there are clearly arbitrage opportunities present.

If the Exchange Rate Between the U