Under the Gold Standard System, If the Par Exchange Rate

question 165

Multiple Choice

Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested in arbitrage would:

• A) buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold.
• B) find that it is not possible to engage in arbitrage.
• C) convert dollars into pounds in the United States and sell it for gold in the United Kingdom.
• D) lose money by trying to exploit any price difference.

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Definitions:

Stop-buy Order

A trading instruction used to purchase a security when it reaches a price above its current market price, typically to limit a loss on a short sale.

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Limit Order

An order specifying a price at which an investor is willing to buy or sell a security.

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