Question

Ignore 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 11 aldas to buy 1 bordo, the price level in Aldaria increases by 20%, and the price level in Borduria increases by 10%. Which of the following statements is correct? O A. None of the choices is correct. OB. The alda has appreciated in nominal terms, but depreciated in real terms. O C. The alda has appreciated in nominal terms, and also appreciated in real terms. OD. The alda has depreciated in nominal terms, but appreciated in real terms. O E. The alda has depreciated in nominal terms, and also depreciated in real terms.

Answer 1

So we need to understand the two things that are being told to us:

• Initially, 10 aldas = 1 brdo and now 11 aldas = 1 bordo, this implies that aldas has depreciated in exchange rate terms or in nominal terms
• Initially, the price of a basket of goods was 50 in Aldaria and the same basket cost 80 in Borduria, now it costs the 50 x 1.20 = 60 in Aldaria however it costs 80 x 1.10 = 88 on Brduria, which means that in real terms the purchasing power has gone down in Borduria less than it has gone down in Aldaria , therefore aldas has depreciated in real terms as well.

So the correct option is E