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Homework answers / question archive / Same as the previous question, as of November 1, 2009, the exchange rate between the Brazilian Real (R$)and U

Same as the previous question, as of November 1, 2009, the exchange rate between the Brazilian Real (R$)and U

Economics

Same as the previous question, as of November 1, 2009, the exchange rate between the Brazilian Real (R$)and U.S. dollar was1.95 Brazilian Real per US dollar. The U.S. inflation rate in the following year is 2.6%, whereas the inflation rate in Brazil is at 8.0%. How would you forecast the exchange rate to be around November 1, 2010?

  •  A. 2.05
  •  B. 1.75
  •  C. 1.85
  •  D. 1.95

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Computation of Forecasted Exchange Rate for November 1, 2010:

Forecasted Exchange Rate as per Purchasing power parity = Spot rate*(1+Inflation Rate Brazil)/(1+Inflation rate US)

= 1.95*(1+8%)/(1+2.6%)

= R$2.05/$

So, the correct option is A "2.05".

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