Question

The Turkish Lira (TL) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February 21 that the lira would be devalued by 20%. The spot exchange rate on February 2001 was TL 68,000/$.

(a) What was the exchange rate after a 20% devaluation?
(b) Within three days the lira had plummeted to TL100,000/$. What percent change was this from the predevaluation rate?

Answer 1

a) The exchange rate after a 20% devaluation is TL85,000/$

b) The percent change was this from the predevaluation rate is -32%

Step-by-step explanation:

a) exchange rate after devaluation = (exchange rate before devaluation)/(1 - Devaluation)

= TL68,000/(1-20%)

= TL68,000/(0.80)

= TL85,000

Therefore, The exchange rate after a 20% devaluation is TL85,000/$

b) percentage change = (starting exchange rate - ending exchange rate)/ending exchange rate

= (TL68,000 - TL100,000)/TL100,000

= -TL32,000/TL100,000

= -0.32

Therefore, The percent change was this from the predevaluation rate is -32%