The Wall Street Journal reported the following news about Brazil on September 24, 2014: "With . . . inflation at 6.5%, Latin America's largest economy is in a straitjacket from which the new government may have a hard time escaping." Meanwhile, The Wall Street Journal reported in another article that in September 2014, inflation in the US has fallen for the first time since 2013.
Illustrate the impact on the market for Brazilian real of the changes in relative inflation rates by answering the following questions.
A. Brazil and the U.S. are trading partners. Given the news above, what is the net result on Brazil's inflation relative to U.S. inflation? (increase, decrease, or no change).
B. Draw a graph depicting the market for foreign exchange between the U.S. and Brazil, which depicts specifically, the market for the Brazilian real (currency code: BRL). You must label each axis, each curve, and the initial equilibrium exchange rate correctly, similar to the examples of the market for euro in the notes.
C. Given your answer to part A above,
* EXPLAIN (in 1 sentence) whether all else equal, the demand for the BRL increases, decreases, or remains unchanged. Explain the reason for your answer and depict it on your graph above. Clearly label all additions to your graph.
* EXPLAIN (in 1 sentence) whether all else equal, the supply of the BRL increases, decreases, or remains unchanged. Explain the reason for your answer and depict it on your graph above. Clearly label all additions to your graph.
D. Based on your answers to (A) and (C) above, tell what happens to the value of the BRL against the dollar (appreciates, depreciates, unchanged, undetermined)? Depict, and clearly label, the new equilibrium on the graph in (B) above.
Choose one of the currencies in the Big Mac Index that appears in The Economist article "Oily and easy: the Big Mac Index".
At the time of the article's publication (Jan. 2015) was the currency you chose identified in the article as over-valued or undervalued against the dollar?
What is the exchange rate with the dollar as you take the Quiz?
Has the exchange rate moved in the direction predicted by Purchasing Power Parity? EXPLAIN.