Question
Under the classic Gold Standard, British pound is pegged to gold at 4.2474 = 1 ounce of gold, and Japanese yen is pegged to gold
Under the classic Gold Standard, British pound is pegged to gold at 4.2474 = 1 ounce of gold, and Japanese yen is pegged to gold at 41.47 = 1 ounce of gold. (a) What is the implied exchange rate between British pound and Japanese yen under the Gold Standard? (b) If market rate is 1= 10, is there an arbitrage opportunity? How much profit can you make? Will the market stay at this rate? Why? c) If market rate is 1= 9.5, is there an arbitrage opportunity? How much profit can you make? Will the market stay at this rate? Why? Assume you have 100 or Japanese yen of equivalent value.
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