Both drop downs are the same. Suppose that one euro can be exchanged for 1.3 U.S

Question

Both drop downs are the same.

Suppose that one euro can be exchanged for 1.3 U.S. dollars and that one U.S. dollar can be exchanged for 80 Japanese yen. If these currencies can be traded freely with low transaction costs, what exchange rate would you expect between euros and the Japanese yen? Describe the transactions that would occur if the euro-yen exchange rate is higher than this amount (more yen per euro). (Hint Is arbitrageelevant?) One euro can be exchanged foryen. (Enter your response rounded to one decimal place.) If the euro-yen exchange rate were higher than one euro for 104.0 yen, then | I should be exchanged for yen euros

Explanation / Answer

1 Euro = $ 1.3

$1 = 80 Japanese Yen

Therefore,

1 Euro = 1.3 x 80 = 104 Japanese Yen

If the Euro-Yen exchange rate were higher than one Euro for 104 Yen, then Euros should be exchanged for Yen. (Yen would then be exchanged for Dollars at $1 = 80 Yen and then Dollars would be exchanged for Euros again to make the profit)

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