Florin and Guilder are two countries separated by a narrow sea. They use currenc

Question

Florin and Guilder are two countries separated by a narrow sea. They use currencies called, respectively, the Flop and the Gulp.

Suppose the nominal exchange rate is 20 Flops per Gulp.

A Guilderian trader buys a 123 Flop barrel of Florish pickles by exchanging 6 Gulps, and a Florish trader buys a 4 Gulp crate of Guilderian apples by exchanging 80 Flops.

Then the Gulp appreciates to 40 Flops per Gulp.

a. What price must the Guilderian pay for the same 123 Flop barrel of pickles?

b. How much must the Florish trader pay for the same 4 Gulp crate of apples?

Explanation / Answer

a) Price paid by the Guilderian trader = 6 x 20/40 = 3 Gulps

b) Price paid by the Florish trader = 80 x 40/20 = 160 Flops

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