Chap002 7 - 25. Suppose that the British pound is pegged to...

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22. Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars? A. $29.40 B. $30.00 C. $0.83 D. $1.20 23. During the period of the classical gold standard (1875-1914) there were A. highly volatile exchange rates. B. volatile exchange rates. C. moderately volatile exchange rates. D. stable exchange rates. E. no exchange rates. 24. The majority of countries got off gold in 1914 when A. the American Civil War ended. B. World War I broke out. C. World War II started. D. none of the above
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Unformatted text preview: 25. Suppose that the British pound is pegged to gold at 6 per ounce, whereas one ounce of gold is worth 12. Under the gold standard, any misalignment of the exchange rate will be automatically corrected by cross border flows of gold. Calculate the possible gains for buying 1,000, if the British pound becomes undervalued and trades for 1.80. (Assume zero shipping costs). (Hint: Gold is first purchased using the devalued British pound from the Bank of England, then shipped to France and sold for 1,000 to the Bank of France). A. 55.56 B. 65.56 C. 75.56 D. 85.56...
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This note was uploaded on 11/09/2011 for the course FIN IFMG201 taught by Professor Eun during the Spring '11 term at Michigan Flint.

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