What happens to the prices of gold in markets

Reference no: EM133536307

Problem

Consider two open economies: Singapore and the U.K., and both economies are in their respective long-run equilibrium. Each part of the question is NOT related to each other.

Suppose you observe the price of an ounce of gold in London and Singapore are £1000 and S$1750 respectively. At the same time, the current spot S$/£ spot rate is 1.843, where S$ = Singapore dollar. Based on the information provided, answer the following questions:

A. If there is any arbitrage opportunity? If yes, what should you do? If not, explain why.

B. What happens to the prices of gold in both markets and the S$/£ spot rate? Explain

According to the monetary approach to the long-run exchange rate, what happens to the S$/£ exchange rate when the retail sales in the U.K. drop? Explain.

Reference no: EM133536307

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