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Use the following information to work Exercise 4.1 and 4. In July 2011, the exchange rate between the U. dollar and the Brazilian real was 1.6 real...
Use the following information to work Exercise 4.1 and 4.2.
In July 2011, the exchange rate between the U.S. dollar and the Brazilian real was 1.6 real per dollar. In the same month, the price of a Big Max was 9.36 real in Sao Paulo and $4.00 in New York. Brazil's interest rate was 12 percent per year and the U.S. interest rate was 1 percent per year.
Source: Pacific Exchange Rate Service and The Economist
4.1. Does purchasing power parity (PPP) hold between Brazil and the United States? If not, does PPP predict that the real will appreciate or depreciate against the U.S. dollar?
4.2. Does interest rate parity hold between Brazil and the United States? Explain
