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 9 aldas to buy 1 bordo, the price level in Aldaria is unchanged, and the price level in Borduria has increased by 12.5 percent. Which of the following statements is correct? A. The alda has depreciated in nominal terms, and also depreciated in real terms. B. None of the choices is correct. C. The alda has appreciated in nominal terms, but depreciated in real terms. D. The alda has depreciated in nominal terms, but appreciated in real terms. E. The alda has appreciated in nominal terms, and also appreciated 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 9 aldas = 1 bordo, this implies that aldas has appreciated 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 same in Aldaria however it costs 80 x 1.125 = 90 on Brduria, which means that in real terms the purchasing power has gone down in Borduria, therefore aldas has appreciated in real terms as well.

So the correct option is A