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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 24. The majority of countries got off gold in 1914 when
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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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