The correct answer is (b) The alda has appreciated in real terms.
Increase in Price level of Alda = 50 + 10% = 55
Increase in Price level of Bordo = 80 + 20% = 96
Current exchange rate is 10 aldas / 1 bordo
After increase in price level, change in exchange rate will be = 10 * [( 1 + 0.55) / (1 + 0.96)]
= 10 * (1.55 / 1.96)
= 10 * 0.79
= 7.9 aldas / 1 bordo
From the above exchange rate we can understand that for 1 bordo we will need 7.9 aldas whereas earlier we needed 10 aldas for 1 bordo. This means that alda has appreciated and become more valuable.
Ignore the previous questions. One can exchange the currencies of Aldaria and Borduria at the rate...
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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...
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