Q1Beef I

Suppose that beef sells for US$15 per kg in the USA and A$20 per kg in Australia.

(a)Where would you buy beef if the exchange rate was A$1.2 per US$1, and where would you resell beef if you wanted to make a profit? (Assume there are no transport costs, trade barriers or taxes.)

(b)If a lot of people behaved like you and the exchange rate was fixed at A$1.2 per US$1, what would happen to the price of beef in the USA? In Australia? When would arbitrage cease to be profitable?