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.

Question

Quizplus · Accepted Answer

If the central bank's official price ratio of gold to silver is ten to one, but the market price ratio is only eight to one, it means that gold is being overvalued by the central bank. This creates an arbitrage opportunity for individuals or institutions to buy silver from the central bank and sell it in the market, while simultaneously buying gold in the market and selling it to the central bank. This would effectively drain the central bank's reserves and lead to insolvency. Therefore, choice A is the best choice.

Suppose That Your Country Officially Defines Gold as Ten Times