When the law of one price holds for all goods and services, the real exchange rate is always equal to:
A) one.
B) the nominal exchange rate.
C) relative prices across countries.
D) 1/nominal exchange rate.

Question

Quizplus · Accepted Answer

When the law of one price holds for all goods and services, it implies that after adjusting for exchange rates, the price of any good or service is the same in all countries. This condition means that the real exchange rate, which adjusts the nominal exchange rate for differences in price levels between countries, is equal to one. This is because the purchasing power of currencies is equalized across countries.

When the Law of One Price Holds for All Goods