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Ignore the previous questions. One can exchange the currencies of Aldaria and Borduria at the rate 10 aldas/1 bordo. The pric

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Answer #1

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.

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