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 Aldaria increases by 10%, with everything else unchanged. Which of the following statements is correct? A. The alda has depreciated in real terms. B.The bordo has appreciated in nominal terms. C. None of the choices is correct. D. The bordo has appreciated in real terms. E. The alda has appreciated in real terms.

Answer 1

Solution:-

It is given in the question that exchange rates have changed from 10 Alda per 1 bordo to 8 alda per bordo. This means that we now need lesser alda to buy 1 bordo than before. This means that alda has appreciated and bordo has depreciated.

Further, it is also given that price levels in aldaria have increased by 10%, i.e. there has been a 10% inflation in aldaria. To adjust the impact of inflationary pressures, the alda currency should have been depreciated by 10% against bordo to maintain purchasing power parity and keep price levels consistent in both countries as before. However, on the contrary the alda's value has appreciated against bordo as discussed above. This shows that alda has seen real appreciation in its value i.e. it's purchasing power has increased relative to bordo.

Analysis of options:

A. As seen above, alda has seen real appreciation, therefore this option is not correct

B. Bordo has not seen any appreciation, therefore this option is not correct

C. Option E is correct. Therefore, this option is not correct

D. Bordo has not seen any appreciation, therefore this option is not correct

E. As explained above, alda has seen real appreciation, therefore this option is correct