Chap002 34 - 26. Suppose that Britain pegs the pound to...

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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 Topic: Classical Gold Standard: 1875-1914 Topic: Evolution of the International Monetary System 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 Topic: Classical Gold Standard: 1875-1914 Topic: Evolution of the International Monetary System
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Unformatted text preview: 26. Suppose that Britain pegs the pound to gold at the market price of 6 per ounce, and the United States pegs the dollar to gold at the market price of $36 per ounce. If the official exchange rate between pounds and U.S. dollars is $5 = 1. Which of the following trades is profitable? A. Start with 100 and trade for $500 at the official exchange rate. Redeem the $500 for 13.89 ounces of gold. Trade the gold for 83.33. B. Start with $100 and buy gold. Sell the gold for 16.67. Sell the pounds at the official exchange rate. C. Start with 100 and buy gold. Sell the gold for $600. D. Start with $500 and trade for 100 at the official exchange rate. Redeem the 100 for 16 2/3 ounces of gold. Trade the gold for $600. Topic: Classical Gold Standard: 1875-1914 Topic: Evolution of the International Monetary System...
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