Question
Suppose that based on the gold contents of the United States and the United Kingdom: One ounce of gold could be converted into 25 U.S.
Suppose that based on the gold contents of the United States and the United Kingdom:
One ounce of gold could be converted into 25 U.S. dollars in the United States, or
One ounce of gold could be converted into 5 British pounds in the United Kingdom The current exchange rate in the foreign exchange market was that one British pound could be converted into 5.25 U.S. dollars. Ignore shipping and transaction costs.
1. What should the equilibrium exchange rate between the U.S. dollars and the British pounds be under the classical gold standard? Show your calculations
. 2. Assume you had 1,000 British pounds, and you were located in the United Kingdom. Could you make money under the classical gold standard? If so, how much could you be making? Explain and show your calculations.
3. Assume you had 1,000 U.S. dollars, and you were located in the United States. Could you make money under the classical gold standard? If so, how much could you be making? Explain and show your calculations.
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