Chap002 28

# Chap002 28 - 8. Suppose that the pound is pegged to gold at...

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6. In the 1850s the French franc was valued by both gold and silver, under the official French ratio which equated a gold franc to a silver franc 15½ times as heavy. At the same time, the gold from newly discovered mines in California poured into the market, depressing the value of gold. As a result, A. the franc effectively became a silver currency. B. the franc effectively became a gold currency. C. silver became overvalued under the French official ratio. D. answers a) and c) are correct Topic: Bimetallism: Before 1875 Topic: Evolution of the International Monetary System 7. Gresham's Law states that A. bad money drives good money out of circulation. B. good money drives bad money out of circulation. C. if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. D. none of the above. Topic: Bimetallism: Before 1875 Topic: Evolution of the International Monetary System
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Unformatted text preview: 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 Topic: Bimetallism: Before 1875 Topic: Evolution of the International Monetary System...
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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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