The price of gold is US$300 per ounce in New York and 2550 pesos per ounce in Mexico City.If the law of one price holds for gold,the nominal exchange rate is __________ pesos per U.S.dollar.

Question

Quizplus · Accepted Answer

According to the law of one price, the prices of the same commodity should be the same in different markets after accounting for the exchange rate. In this case, if the price of gold is $300 per ounce in New York and 2550 pesos per ounce in Mexico City, then the exchange rate should be calculated as follows:

300 dollars per ounce = x pesos per ounce

x = 300 * 2550 pesos per ounce

x = 765,000 pesos per ounce

Therefore, the nominal exchange rate is 765,000 / 90,000 = 8.5 pesos per U.S. dollar.

The Price of Gold Is US$300 Per Ounce in New