The inflation rate in Switzerland is 0.6% while the inflation rate in Brazil is 8.3%. If purchasing power parity holds, what should happen to the exchange rate of the Swiss franc relative to the
Brazilian real?

Question

Quizplus · Accepted Answer

The Swiss franc should appreciate relative to the Brazilian real because Switzerland has a lower inflation rate than Brazil. The difference in inflation rates (8.3% - 0.6% = 7.7%) approximates the rate at which the Swiss franc should appreciate relative to the Brazilian real. However, due to rounding in the options, the closest match is an appreciation of 7.6%.

The Inflation Rate in Switzerland Is 0