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3) Two countries, the US and England, produce only one good, wheat. Suppose the price of wheat is $3.25 per pound in the US, and 1.35 pounds in the UK. a. According to the law of one price, what should the $:pound spot exchange rate be

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Answer:

$2.4074/pound

Explanation:

The law of one price states that the same good in two different countries must be sold for the same amount of money, which means that the $/pound spot rate must ensure that wheat costs the same on both countries.

Therefore, the spot rate 'r' is:

[tex]\pounds 1.35*r=\$ 3.25\\r= \frac{\$ 3.25}{\pounds 1.35}\\r=2.4074 \frac{\$}{\pounds}\\[/tex]

The spot rate should be $2.4074/pound.

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