Question

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

Answer 1

Answer:

The exchange rate is $1 = 2 pounds.

Explanation:

The exchange rate is the relative value of the two currencies. In other words, the amount of one currency you can exchange for another currency.  

The US dollar is defined as equal to 0.1 ounces of gold.  

The British Pound is defined as equal to 0.05 ounce of gold.  

The exchange rate between the two countries is

= $\frac{value\ of\ US\ dollar}{value\ of\ British\ Pound}$

= $\frac{0.1}{0.05}$

= 2

So the exchange rate is $1 = 2 pounds. This means that $1 can be used to exchange 2 pounds.