Suppose That the British Pound Is Pegged to Gold at £6

question 1

Multiple Choice

Suppose that the British pound is pegged to gold at £6 per ounce,whereas one ounce of gold is worth FF12.Under the gold standard,any misalignment of the exchange rate will be automatically corrected by cross border flows of gold.Calculate the possible savings for buying FF1,000,if the British pound becomes undervalued and trades for FF1.80/£.(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 FF1,000 to the Bank of France) .

• A) £55.56
• B) £65.56
• C) £75.56
• D) £85.56

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