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?

Question

Quizplus · Accepted Answer

Option A:
- Start with £100 = $500
- Redeem for gold = 13.89 ounces
- Trade gold for £83.33
Total profit = £83.33 - £100 = -£16.67 (not profitable)

Option B:
- Start with $100 
- Buy gold = 2.78 ounces
- Sell gold for £16.67
- Sell pounds at official exchange rate = $83.33
Total profit = $83.33 - $100 = - $16.67 (not profitable)

Option C:
- Start with £100
- Buy gold = 16.67 ounces
- Sell gold for $600
Total profit = $600 - £100 x $5/£1 = $100 (profitable)

Option D:
- Start with $500
- Trade for £100 at official exchange rate
- Redeem for gold = 54 ounces
- Trade gold for $600
Total profit = $600 - $500 = $100 (profitable)

Therefore, the best choice is D, as it offers a profitable trade.

Suppose That Britain Pegs the Pound to Gold at the Market