Question

A kilogram of coal costs 1.5 in Germany and​ $1 in the United​ States, the law of one price calculates the expected exchange rate between the euro and the dollar to be​ ________.

A. ​1.5/$
B. ​$1.67/
C. ​0.67/$
D. ​$0.12/

Answer 1

The law of one price calculates the expected exchange rate between the euro and the dollar based on the prices of coal in Germany and the United States.

Step-by-step explanation:

The law of one price states that in an efficient market, the same commodity should have the same price across different locations when the price is expressed in a common currency. In this case, we can compare the price of coal in Germany and the United States to calculate the expected exchange rate between the euro and the dollar.

The price of coal is 1.5 euros per kilogram in Germany and $1 per kilogram in the United States. To calculate the expected exchange rate, we need to determine how many euros can be purchased with 1 dollar by dividing the price of coal in Germany by the price of coal in the United States:

Expected exchange rate = 1.5 euros / $1 = 1.5

Therefore, the expected exchange rate between the euro and the dollar is 1.5 euros / $1.