Chap002 29

Chap002 29 - A. only the silver currency will circulate. B....

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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? 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 Topic: Bimetallism: Before 1875 Topic: Evolution of the International Monetary System 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,
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Unformatted text preview: 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 Topic: Bimetallism: Before 1875 Topic: Evolution of the International Monetary System 11. Suppose that your country officially defines gold as ten times more valuable than silver (i.e. the central bank stands ready to redeem the currency in gold and silver and the official price of gold is ten times the official price of silver). If the market price of gold is only eight times as much as silver. A. The central bank could go broke if enough arbitrageurs attempt to take advantage of the pricing disparity. B. The central bank will make money since they are overpricing gold. 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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