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