Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 30

Suppose you live in Frigidia, a country near the North Pole that is experiencing hyperinflation. You work for a U.S. company that pays you a monthly income of $100 U.S. Today, you can exchange those dollars for frigids, the currency of Frigidia, at a rate of 1,000 frigids/dollar. You pay a monthly heating bill that costs $10 U.S. Instead of paying the heating bill, you could simply burn Frigidia notes (which you can obtain in one-frigid denominations) at a rate of 1 million per month to supply heating. What would the exchange rate between frigids and U.S. dollars have to be for you to decide to burn bills instead of paying for heating? What level of inflation does this represent, assuming the real exchange rate remains the same?