If the U.S. dollar-British pound exchange rate is $1.25 per pound, and the U.S,

Question

If the U.S. dollar-British pound exchange rate is $1.25 per pound, and the U.S, dollar-euro rate is $0.80 per euro: The pound per euro rate is: [ppe] If a beanbag chair costs $31 in the United States and 24 in United Kingdom, what is the real "beanbag chair" exchange rate? Assume a dollar-pound exchange rate of $1.5126 per pound. The same television set costs $300 in the United States. $550 in France. 300 in the United Kingdom, and ¥150,000 in Japan. If the law of one price holds, what are the euro-dollar, pound-dollar, and yen-dollar exchange rates? The euro/dollar exchange rate is (/$) The pound/dollar exchange rate is (/$) The yen/dollar exchange rate is (/$)

Explanation / Answer

1) If the dollar-pound exchange rate is $1.25 then this implies $1 would buy 0.80 pound. Now dollar-euro exchange rate is $0.80 which implies that $1 would buy 1.25 euro, then it implies 0.80 pound is equal to 1.25 Euro. Pound -Euro exchange rate is 1.25/0.8 = 1.5625

2) Beanbag cost $31 in US and 24 in UK. Thus bean bag should costs 31*1/1.5126 or 20.49 in the UK. So bean bag exchange rate is (31/24)*1/1.5126 = 0.8539

3) For the given case, the euro-dollar exchange rate is 550/300 or 1.833

Pound dollar exchange rate is 300/300 or 1

Yen-Dollar exchange rate is 150,000/300 = 500

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