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    Question

    If the Law of One Price holds then

    I. Changes in national saving do not affect the real exchange rate

    II. Changes in investment spending do affect the real exchange rate

    III. When the real exchange rate is fixed, then any change in the nominal exchange rate must be due to changes in the price levels in either of the two countries

    Which of the above statements is true?

    A Statements I, II and III are true. Correct Answer Incorrect Answer
    B Statements I and II are true. Correct Answer Incorrect Answer
    C Statements I and III are true. Correct Answer Incorrect Answer
    D Statement I is true. Correct Answer Incorrect Answer

    Solution

    The Law Of One Price (referred to as LOOP) is an economic theory which states that the price of identical goods in variousmarkets must be the same after taking into consideration thecurrencyexchange, i.e. when the prices are expressed in the same currency. The law applies mainly to securities traded on financial markets. LOOP forms thebasis of thepurchasing powerparity principle. The assertion, in some cases, would cost exactly the same number.

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