Two countries, the U.S. and Brazil, produce just one good, wheat. Suppose the price of wheat in the U.S. is $2.00 per bushel and in Brazil Real 4.24 per bushel.
(1) According to purchasing power parity, what should be the current spot rate between dollar and Brazil real?
(2) Suppose the price of wheat over the next year is expected to increase by 1% in the US. and increase 2% in Brazil. What should be the one-year real/dollar forward rate?
(3) Given your answers to (1) and (2), and given the current interest rate in the U.S. is 0.5%% for notes of a one-year maturity, what would you expect current the interest rate in Brazil to be?