Around 1900: A Small Town On The US-Mexican Border Was Exper ✓ Solved

Around 1900 A Small Town On The US Mexican Border Was Experiencing

Use the exchange rate theory to explain why this worker had free beer. Share your thoughts. 100 word minimum

Sample Paper For Above instruction

In the scenario described, the worker exploited the stable currency exchange rates between the U.S. and Mexico, which effectively created a circular arbitrage opportunity. The exchange rates were set so that 1 USD was worth 0.90 MXN on both sides, and vice versa, creating a situation of perfect parity with a ten percent discount for cross-border transactions. The worker’s tactic involved exchanging currencies at these fixed rates repeatedly, allowing him to receive a Mexican peso in exchange for his dollar, then using that peso to buy another beer, and then exchanging back for dollars, ending where he started with no loss. This cycle essentially resulted in free beer because the exchanges canceled each other out, demonstrating how arbitrage can exploit discrepancies or fixed exchange rates in the absence of transaction costs. The stability of the exchange rates meant that the worker’s transactions did not generate profit or loss but allowed him to enjoy free beer through currency exchange manipulations—a classic example of currency arbitrage exploiting fixed or stable rates. This scenario highlights how fixed exchange rates can be susceptible to arbitrage, especially when individuals recognize the equilibrium, enabling them to benefit from the currency’s relative valuation without risk of loss. Thus, the worker’s repeated exchanges, underpinned by the stable rates, allowed him to enjoy free beer, illustrating the principles of arbitrage and the importance of exchange rate stability in international trade and finance.

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