Question

Suppose that under the Bretton Woods system, the dollar is pegged to gold at a rate of $\backslash (35$per ounce and the pound sterling is pegged to the dollar at a rate of $\mathrm{\backslash )}2=\pounds 1$. If the dollar is devalued against gold and the pegged rate is changed to$\$40$ per ounce, what does this imply for the exchange value of the pound in terms of dollars?

Short answer

The exchange value of the pound in terms of dollars is$2.295/\epsilon$.

Step-by-step solution

Introduction

An exchange value is the rate at which one currency is exchanged for another in the financial world. National currencies are the most prevalent, but they can also be subnational, as in Hong Kong, or supranational, as with the euro.

Given Information

The market's currency is degraded against metal, or the pegged rate is increased that$\$40$ per ounce.

Explanation

The currency remains discounted to platinum if a greenback has overvalued over gold and the anchored ratio is raised to $\$40$per ounce, but again the unit will still be represented at $\mathrm{\$}2=\pounds 1$.

Is when sterling is fixed to metal, establish the currency rate as chooses to follow: The proportion is as wants to follow $\pounds 17.50=1$:

$\mathrm{\$}35=1\text{ounce}$

$\mathrm{\$}2=\pounds 1$

Pound to dollar index $=\left(\frac{\mathrm{\$}40}{\pounds 17.50}\right)$

$=2.295/\epsilon$

As a result, the value of the pound in terms of the dollar is$2.295/\epsilon$ .