Q1. Coffee beans are produced in Egypt and sold in many countries. In Egypt, a sack of beans sells for 12.95 Egyptian pounds. In the US, the beans sell for $6.99. Suppose that the exchange rate is $0.90 U.S. = £1.00 Egyptian. • How much would it cost in U.S. currency to buy the coffee in Egypt? How much would it cost in Egyptian currency to buy the beer in the U.S.? Is there an arbitrage opportunity? If there is an arbitrage opportunity, where would you buy and where would you sell? How much profit could you expect on a sack of beans?

Q1. Coffee beans are produced in Egypt and sold in many countries. In Egypt, a sack of beans sells for 12.95 Egyptian pounds. In the US, the beans sell for $6.99. Suppose that the exchange rate is $0.90 U.S. = £1.00 Egyptian. • How much would it cost in U.S. currency to buy the coffee in Egypt? How much would it cost in Egyptian currency to buy the beer in the U.S.? Is there an arbitrage opportunity? If there is an arbitrage opportunity, where would you buy and where would you sell? How much profit could you expect on a sack of beans?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 23CTQ: Why would a nation dollarizeâ€”that is, adopt another countrys currency instead of having its own?

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