- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Currency Exchange Rates: Understanding Equilibrium Value
- Subject 3. A Long-Term Framework for Exchange Rates
CFA Practice Question
The law of one price means that:
II. A unit of home currency must have the same purchasing power worldwide.
III. Foreign exchange rates will react to differences between domestic and foreign rates of inflation.
IV. Only small deviations from equilibrium can exist in the long run.
I. A particular TV set that sells for 750 CAD in Vancouver should cost 500 USD in Seattle when the exchange rate between Canada and the U.S. is 1.50 CAD/USD.
II. A unit of home currency must have the same purchasing power worldwide.
III. Foreign exchange rates will react to differences between domestic and foreign rates of inflation.
IV. Only small deviations from equilibrium can exist in the long run.
Correct Answer: I, II and III.
User Contributed Comments 4
| User | Comment |
|---|---|
| Walkiria | no deviations at all! |
| Masterkang | No - big deviations CAN exist in the short run. |
| rhardin | From the notes: "The law of one price means that arbitragers prevent all but small deviations from equilibrium." So... It seems to me that IV would be correct too, at least in the short run. |
| itsmclovin | In the short run, so IV "long run" is not correct. |