Question

a. Assume that the value of a country's currency is 1 when the price level is 1. If the price level changes to 1.2, the value of the country's currency will change by what ?? percent. b. Now assume that the value of a country's currency is equal to 1 when the price level is 1.4. If the price level changes to 1.5, the value of the country's currency will change by what ?? percent.

Answer 1

Value of money is calculated as follows -

Value of money = (1/Price level)

(a)

Initially, the price level is 1 and the value of money is 1.

Now, price level changes to 1.2

Value of money = 1/Price level = 1/1.2 = 0.8

Calculate the percentage change in the value of currency -

% change = [(New value of currency - Initial value of currency)/Initial value of currency] * 100

% change = [(0.8 - 1)/1] * 100 = -20%

Thus,

The value of the country's currency will change by -20 percent.

(b)

Initially, the price level is 1.4 and the value of money is 1.

Now, price level changes to 1.5

Value of money = 1/Price level = 1/1.5 = 0.6

Calculate the percentage change in the value of currency -

% change = [(New value of currency - Initial value of currency)/Initial value of currency] * 100

% change = [(0.6 - 1)/1] * 100 = -40%

Thus,

The value of the country's currency will change by -40 percent.