The next questions refer to the following.
The nation of North does 20% of its trade with East, 30% with West, and 50% with South. Suppose that, relative to a base year, North's currency appreciates 80% against East's currency, appreciates 40% against West's currency, and depreciates 10% against South's currency.
-If the exchange rate is defined according to British custom,then the effective exchange rate for North is now
A) 77
B) 87
C) 95
D) 110
E) 123

Question

Quizplus · Accepted Answer

The effective exchange rate (EER) for North can be calculated by taking into account the trade weights and the appreciation or depreciation of North's currency against the currencies of East, West, and South. According to British custom, an appreciation of the currency means the effective exchange rate increases, and a depreciation means it decreases. The calculation is as follows:- With East (20% of trade): 80% appreciation- With West (30% of trade): 40% appreciation- With South (50% of trade): 10% depreciationEER = (1.80 * 0.20) + (1.40 * 0.30) + (0.90 * 0.50)     = 0.36 + 0.42 + 0.45     = 1.23This means the effective exchange rate for North is now 123% of the base year, which corresponds to option E.

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