Question

The price of a bag increased from \$8 to \$12 in the US and from Rs. 400 to Rs. 480 in India. What is the effect on the dollar in terms of exchange rate?

• Revaluated
• Appreciated
• Depreciated
• Devaluated

• A. Revaluated
• B. Appreciated
• C. Depreciated
• D. Devaluated

Hint:

Remember:

• Higher inflation $\rightarrow$ Currency loses value
• Lower purchasing power $\rightarrow$ Currency depreciates
• Appreciation means increase in currency value

Answer 1

The Correct Option is C

Concept: Exchange rate changes can be understood using the Purchasing Power Parity (PPP) concept. If prices rise faster in one country compared to another, the currency of that country tends to lose purchasing power and depreciate.

Step 1: Calculate percentage increase in price in the US. Initial price: \[ \$8 \] New price: \[ \$12 \] Increase: \[ 12-8 = 4 \] Percentage increase: \[ \frac{4}{8}\times100 = 50% \]

Step 2: Calculate percentage increase in price in India. Initial price: \[ Rs.400 \] New price: \[ Rs.480 \] Increase: \[ 480-400 = 80 \] Percentage increase: \[ \frac{80}{400}\times100 = 20% \]

Step 3: Compare inflation rates. Prices increased: \[ 50% \text{ in the US} \] and \[ 20% \text{ in India} \] Thus, inflation is higher in the US. Higher inflation reduces the purchasing power of the dollar. Therefore: \[ \text{Dollar depreciates} \] Hence, the correct answer is: \[ \boxed{\text{Depreciated}} \]