Assume that the price of a bushel of corn EUR 3

Finance Dec 26, 2020

Assume that the price of a bushel of corn EUR 3.50 in the Euro Zone and USD 4.00 in the US market. Currently the USD/EUR spot exchange rate is: X0USD/EUR = 1.05. Based on ILOP, all else equal…

A. The US is likely to have a trade deficit with the Euro Zone

B. Trade between the US and the Euro Zone should be balanced

C. The US is likely to have a trade surplus with the Euro Zone

D. There is no relation between trade balances and the pricing of FX

Expert Solution

the exchange rate should actually be 4/3 = 1.33

so the USD is overvalued so it is better to procure the corn from Europe

A. The US is likely to have a trade deficit with the Euro Zone

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