At the beginning of the year the exchange rate between the Brazilian Real and the U.S. dollar was 2.2 Reals per dollar. Over the year Brazilian inflation was 12% and U.S. inflation was 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ________________ dollars per Real.

Question

Quizplus · Accepted Answer

According to the formula for calculating PPP, [(original exchange rate x (1 + domestic inflation)) / (1 + foreign inflation)], we have [(2.2 x (1+0.12)) / (1+0.04)] = 2.8498. However, we are asked to find the dollar per Real rate, so we need to take the reciprocal of this value, which gives us approximately 0.4182. Therefore, the correct answer is D.

At the Beginning of the Year the Exchange Rate Between