Final answer:
To find the real exchange rate between the Brazilian real and Canadian dollar, adjust the nominal rate of 3.9669 by the inflation rates of 8.1% for Brazil and 1.6% for Canada by using the formula: Real Exchange Rate = (Nominal Exchange Rate x (1 + Brazilian inflation)) / (1 + Canadian inflation).
Step-by-step explanation:
The question is asking to calculate the real exchange rate between the Brazilian real and Canadian dollar, given the nominal exchange rate and the inflation rates in both countries. To determine the real exchange rate, one must adjust the nominal exchange rate by the price levels (a factor derived from inflation rates) of the two countries. Using the formula:
Real Exchange Rate = (Nominal Exchange Rate × Price Level of Domestic Country) / Price Level of Foreign Country
The nominal exchange rate is given as 3.9669 Brazilian reals per Canadian dollar. Assuming that the price level is equivalent to the inflation rate plus one (price level = 1 + inflation rate), we have:
Price Level Brazil = 1 + 0.081 (Brazilian inflation rate)
Price Level Canada = 1 + 0.016 (Canadian inflation rate)
Substituting into the formula, we get:
Real Exchange Rate = (3.9669 × (1 + 0.081)) / (1 + 0.016)
After the calculation, the real exchange rate can be found.