Under the gold standard system, 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain. If the price of gold in Great Britain decreases by 10%, then:
A) the new exchange rate would show approximately 10% depreciation of the dollar.
B) $1 = 1.64 pounds.
C) 1 pound = $1.64.
D) the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64.

Question

Quizplus · Accepted Answer

Since the price of gold in Great Britain has decreased by 10%, the new exchange rate between the US and Great Britain under gold standard will adjust accordingly. 1 ounce of gold will now be worth 13.95 pounds in Great Britain (15.5 - 10% of 15.5). To maintain the parity of gold value between the US and Great Britain, 1 ounce of gold in the US should also be adjusted to $20.70 ($23 ÷ 1.11). Therefore, the new exchange rate will be 1 pound = $1.4878 ($20.70 ÷ 13.95), which can be approximated to $1.64. So, the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64.

Under the Gold Standard System, 1 Ounce of Gold Was