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Chap002 3

# Chap002 3 - Hint assume that you have \$350 available for...

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8. Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at \$35 per ounce. This implies an exchange rate of \$1.75 per pound. If the current market exchange rate is \$1.80 per pound, how would you take advantage of this situation? Hint: assume that you have \$350 available for investment. A. Start with \$350. Buy 10 ounces of gold with dollars at \$35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of \$1.80 per pound to get \$360. B. Start with \$350. Exchange the dollars for pounds at the current rate of \$1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at \$35 per ounce. C. a) and b) both work D. None of the above 9. Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at \$35 per ounce. This implies an exchange rate of \$1.75 per pound. If the current market exchange rate is \$1.60 per pound, how would you take advantage of this situation?
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Unformatted text preview: Hint: assume that you have \$350 available for investment. A. Start with \$350. Buy 10 ounces of gold with dollars at \$35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of \$1.80 per pound to get \$360. B. Start with \$350. Exchange the dollars for pounds at the current rate of \$1.60 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at \$35 per ounce. C. a) and b) both work D. None of the above 10. Suppose that the United States is on a bimetallic standard at \$30 to one ounce of gold and \$2 for one ounce of silver. If new silver mines open and flood the market with silver, A. only the silver currency will circulate. B. only the gold currency will circulate. C. no change will take place since citizens could exchange their gold currency for silver currency at any time. D. none of the above...
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