In equilibrium, all traded goods sell at the same price internationally. If the same goods are expressed in their home prices, then the ratio of the prices is equal to:
A) one.
B) zero.
C) the rate of interest.
D) the nominal exchange rate between the two currencies.

Question

Quizplus · Accepted Answer

In equilibrium, the law of one price holds, which means that all traded goods sell at the same price internationally. If the same goods are expressed in their home prices, then the ratio of the prices is equal to the nominal exchange rate between the two currencies. Therefore, choice D is the correct answer. The other options are incorrect as the ratio of prices would either be one (A) or zero (B), or related to the rate of interest (C), which is not necessarily relevant to the question.

In Equilibrium, All Traded Goods Sell at the Same Price