The Brazilian inflation rate is expected to be 30% per year for the next 4 years. The U.S. inflation rate is expected to be 3% per year over the same period. A Brazilian real currently costs 87.36 cents. Assuming RPPP holds, how many reals will you need to buy a dollar in four years?

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Quizplus · Accepted Answer

The Relative Purchasing Power Parity (RPPP) formula is used to estimate the future exchange rate based on the inflation rates of two countries. The formula is: E1 = E0 * (1 + i_foreign) / (1 + i_domestic), where E1 is the future exchange rate, E0 is the current exchange rate, i_foreign is the inflation rate of the foreign country, and i_domestic is the inflation rate of the home country. Here, E0 = 0.8736 USD/BRL (since 1 BRL = 87.36 cents), i_foreign (Brazil) = 30% or 0.30, and i_domestic (U.S.) = 3% or 0.03. Applying these values for 4 years: E1 = 0.8736 * (1 + 0.30)^4 / (1 + 0.03)^4 = 0.8736 * (2.8561) / (1.1255) ≈ 2.905. Therefore, in four years, you will need approximately 2.905 reals to buy one dollar, assuming RPPP holds.

The Brazilian Inflation Rate Is Expected to Be 30% Per