Question

1. The US issued a coin called an Eagle made out of 90%-pure gold and weighing 15 gms. In 1890 this coin was valued at $10. The British minted a coin called

a Guinea worth and weighing 8 gms of 22 carat gold. a. What was the exchange rate between the pound and the dollar? (show how you derive this)

b. List three ways (with specific amounts) that the US could amend their coinage to depreciate the exchange rate by 10%.

c. Using your method in part a, derive the new exchange rate.

Answer 1

a) 22 carat gold is equivalent to 90% pure gold. Hence if 15 gms of this gold was equivalent to $10, 1gm would be equal to $10/15 and 8gm would be equal to $80/15 i.e $5.3. Hence, if 8gms of guinea is €1, then €1 = $5.3 or $1 = € 0.18 ( In this question, the worth of guinea is not given, the exchange rate would be adjusted accordingly)

b) Depreciating the exchange rate by 10% would mean it increases to say $1= €0.198. This could be done (a) by increasing the size of Eagle and hence having more gms of gold (b) by using higher percentage of gold in the existing coin

c) Thr new exchange rate would be $1=€0.198