Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested in arbitrage would:
A) buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold.
B) find that it is not possible to engage in arbitrage.
C) convert dollars into pounds in the United States and sell it for gold in the United Kingdom.
D) lose money by trying to exploit any price difference.

Question

Quizplus · Accepted Answer

The person interested in arbitrage would buy dollars in the United Kingdom, where the market exchange rate is more favorable, and then exchange the dollars for a larger quantity of gold in the United States. This would take advantage of the lower UK market exchange rate and the higher par exchange rate under the gold standard system.

Under the Gold Standard System, If the Par Exchange Rate