Suppose that the United States and the United Kingdom both use the gold standard. Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50 = £1. What actions would you follow to take advantage of this temporary opportunity for arbitrage?
A) Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency markets, and buy gold with dollars in the United States.
B) Sell gold for dollars in the United States, buy pounds with dollars in currency markets, and buy gold with pounds in the United Kingdom.
C) Sell gold for dollars in the United States, sell pounds for dollars in currency markets, and buy gold with dollars in the United Kingdom.
D) Sell gold for dollars in the United Kingdom, buy pounds with dollars in currency markets, and buy gold with pounds in the United States.
Ans: A) Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency markets, and buy gold with dollars in the United States.
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