When Britain announced its entry into the exchange rate mechanism of the EMS on October 5, 1990, the price of British gilts (long term government bonds) soared and sterling rose in value.

a. What might account for these price jumps?

b. Sterling entered the ERM at a central rate against the DM of DM 2.95, and it is allowed to move within a band of +/- 6% of this rate. What are sterling’s upper and lower rates against the DM?