Country X has a currency called the Rupee (R). At the beginning of the year, the
ID: 1106918 • Letter: C
Question
Country X has a currency called the Rupee (R). At the beginning of the year, the exchange rate between the Rupeee and the U.S. dollar was R140/$. The inflation rate in Country X was running during the year at an annual rate of 50 percent, whereas the inflation rate in the U.S. was running at 2 percent.
What was the exchange rate between Rupee and the U.S. dollar at the end of the year? You must show the set up and calculations to get credit.
Which currency had depreciated at the end of the year? Explain your answer.
Explanation / Answer
Exchange rate at the end of the year = 140*((1+inflation rate in country X/(1+ inflation rate in USA))
Exchange rate at the end of the year = 140*((1+50%)/(1+2%))
Exchange rate at the end of the year = R205.88/$
The value of currency Rupee (R) will depreciate with respect to the currency $ due to relatively higher level of inflation rate in the country X. It is 50% in the country X in comparison to the inflation rate of 2% in the USA.