Question

The spot exchange rate between the dollar and the Brazilian real is a flexible rate. What are the effects of each of the following events on this exchange rate? Evaluate the effect of each event independently of the others. It is sufficient to identify whether the U.S. dollar appreciates or depreciates.

1. There is a decrease in Brazilian demand for U.S.-made vehicles as the Brazilian economy is in a recession.  
2. There is an increase in the U.S. demand for Brazilian-made aircraft.  
3. Political uncertainties in the U.S. lead Brazilian investors to shift their financial investments out of the U.S. and back to Brazil.
4. U.S. demand for Brazilian financial assets increases as inflation in Brazil decreases.    

Answer 1

A spot exchange rate refers to the immediate exchange rate fixed by the two exporting/importing nations with regards to the price of a commodity or product. Spot exchange rates are fixed by the two parties at the instance of the trade and the good or service is immediately traded. Let us explicitly evaluate the effects of the events as mentioned:

                                         Since the Brazilian economy is in recession, therefore its demand for the US made vehicles have decreased. As a result of this, if US and Brazil come in to terms of agreement to trade a product or vehicle, the spot exchange fixed from the side of the US side will be as normal as US economy is stagnant, however, the spot exchange rate fixed from the Brazilian side will be comparatively much lesser, as it would want to import the goods at much lesser cost owing to the lack of finances available due to the ongoing recession. Similarly, if Brazil wants to export a product, it will fix a very high spot exchange rate in contrast to the normal exchange rate fixed by the US.

  If the US demand for Brazilian made aircraft   increase, the spot exchange rate fixed from the US side for the Brazilian aircraft will be primarily lower and identifying the US demand, Brazil will try to negotiate its aircraft export at a high spot exchange rate. Although it is normal that US will finally have to buy the aircraft's at a comparatively high spot exchange rate.

If political uncertainties in the United States lead the Brazilian investors to shift their financial investments out of the US and back to Brazil, Brazil will experience a surge in investment and consequently US will experience a dip in foreign investment or FDI. In this situation , if any trade takes place at spot exchange rate, this is will lead to the Brazilian side demanding a high spot exchange rate for any exported good or service, however it will keep the sport exchange rate for importing goods as normal, and from the US perspective, this is will lead to the US side demanding a high spot exchange rate for any exported good or service, however it will keep the sport exchange rate for importing goods as normal, however, the most likely outcome will be that US will have to pay a considerably higher exchange rate for the imported goods or services.

If inflation in Brazil increases and so the US demand for Brazilian financial assets increases, the spot exchange rate fixed from the US side for the Brazilian financial assets will be primarily lower and identifying the US demand and considering that the inflation in their country has reduced, Brazil will try to negotiate its financial assets export at a high spot exchange rate. Although it is normal that US will finally have to buy the financial assets at a comparatively high spot exchange rate.