Suppose that the exchange rate is 10 Moroccan dirhams per Canadian dollar.Also suppose that you can buy a crate of oranges for 300 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Ottawa for $35.Which of the following is consistent with these facts?
A)The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Canada and selling them in Morocco.
B)The real exchange rate is greater than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.
C)The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Canada and selling them in Morocco.
D)The real exchange rate is less than one, and arbitrageurs could profit by buying oranges in Morocco and selling them in Canada.

Question

Quizplus · Accepted Answer

If the exchange rate is 10 dirhams per Canadian dollar and a crate of oranges costs 300 dirhams in Morocco, then the price of the crate in Canadian dollars is $30. Therefore, the price of a crate in Canada ($35) is greater than the price of a crate in Morocco ($30). This means that the Moroccan dirham is undervalued relative to the Canadian dollar, so the real exchange rate is greater than one. Arbitrageurs could profit by buying oranges in Morocco (paying 300 dirhams) and selling them in Canada (receiving $35). They would be able to exchange the Canadian dollars back into dirhams at the original exchange rate and make a profit.

Suppose That the Exchange Rate Is 10 Moroccan Dirhams Per