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

Economics Dec 16, 2020

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

Expert Solution

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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