Question

1.

A basket of goods sold in the Eurozone is priced and weighted as shown in the follow table:

Good	Price	Weight
Meat	€33/ton	0.3
Textiles	€20/ton	0.5
Grain	€10/ton	0.2

And the same basket for the United States is priced and weighted as shown in the following table:

Good	Price	Weight
Meat	€14/ton	0.5
Textiles	€20/ton	0.3
Grain	€10/ton	0.2

The exchange rate for $/€ is 1.25.
Is it preferable for an arbitrageur to purchase goods in the United States or in the Eurozone? To which of them should the arbitrager resell these goods?

2. In your own words, explain the essence of the trilemma. Why can't a country with fixed exchange rates and capital mobility maintain autonomy?

Answer 1

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