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In a world economy consisting of France and Australia, both countries produce only one good: wine. A bottle of wine costs EUR 3.45 in France,
In a world economy consisting of France and Australia, both countries produce only one good: wine. A bottle of wine costs EUR 3.45 in France, and AUD 6.16 in Australia. France and Australia have engaged in a target-zone arrangement, in which the central rate is EUR0.73/AUD and exchange rates are allo to fluctuate by 19%. The current exchange rate is EUR0.8322/AUD. If France imposes a tariff of EUR0.45 per bottle on wine imported from Australia, what is the maximum possible spot exchange rate that could occur if absolute PPP holds? a. EUR0.83/AUD b. EUR0.56/AUD c. EUR0.73/AUD d. EUR1.66/AUD e. EUR0.49/AUD
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