Question

lgnore the previous questions. One can exchange the currencies of Aldaria and Borduria at the rate 10 aldas/1 bordo. The price level in Aldaria is 50, while in Borduria the price level is 80. Suppose it now takes 8 aldas to buy 1 bordo, and the price level in Borduria has risen to 100, with everything else unchanged. Which of the following statements is correct? A. The bordo has depreciated in real terms. B. The alda has depreciated in real terms. C. None of the choices is correct. D. The bordo has appreciated in nominal terms. E. The alda has appreciated in nominal terms.

Answer 1

Solution:-

As given in the question, the earlier exchange rate was 10 alda per 1 bordo which has now changed to 8 alda per 1 1bordo. Let's analyze this.

Bordo required to buy 1 alda before: 1/10 or 0.1

Bordo required to buy 1 alda now: 1/8 or 0.125

Therefore, the value of bordo has been depreciated by 25% against alda [calculated as {(0.125-0.1)/0.1}]

Now, we also now that price levels have changed in borduria. It took 80 bordo earlier to buy a basket of goods and now it takes 100 bordo to buy the same basket of goods. Therefore, there is an inflation of 25% [calculated as {(100-80)/80}]

Therefore, as we can see there is an inflation of 25% in borduria due to which the value of bordo has seen a nominal fall of 25% which has resulted in bordo's value falling by 25% against alda (resulting in nominal appreciation of 25% in alda's value) as calculated above. Therefore, there has been nominal decrease in the value of bordo and nominal increase in the value of alda but no real depreciation or appreciation in the values of either currencies.

Analysis of various options:

Option A- Since, there has been no real depreciation in bordo's value, option A is not correct

Option B- Since, there has been no real depreciation in alda's value, option B is not correct

Option C- Since, Option E is correct, option C is not correct

Option D- Since, bordo's value has seen nominal depreciation, option D is not correct

Option E- Since, bordo's value has seen nominal depreciation and alda's value has seen nominal appreciation, option E is correct