Suppose the U.S.dollar is defined by law as being equal to 0.1 ounce of gold.Further suppose the British pound is defined as being equal to 0.05 ounce of gold.The implied exchange rate between the pound and the dollar is

Question

Quizplus · Accepted Answer

Since the exchange rate between the pound and the dollar is fixed and defined by their respective gold values, we can calculate the implied exchange rate based on those values. Given that $1 = 0.1 oz gold and £1 = 0.05 oz gold, we can simply divide the gold values to get the implied exchange rate:

$1/0.1 oz gold ÷ £1/0.05 oz gold = $1/£2

Therefore, the implied exchange rate between the pound and the dollar is fixed at $1 = £2. Option B is the correct answer.