The Wall Street Journal reported the following news about Brazil on September 24

Question

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. Describe 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? (Answer simply either: increase, decrease, or no change).

B. Consider the market for the Brazilian real (BRL) and the demand and supply model used to depict the currency market in class and in the text. * EXPLAIN whether all else equal, the demand for the BRL increases, decreases, or remains unchanged.

* Explain the reason for your answer and clearly explain who are the demanders of Brazilian real in this model, and distinguish a change in demand from a movement along the demand curve. 1-3 sentences.

* EXPLAIN whether all else equal, the supply of the BRL increases, decreases, or remains unchanged. Explain the reason for your answer and clearly explain who are the suppliers of Brazilian real in this model, and distinguish a change in supply from a movement along the supply curve. 1-3 sentences.

C. Based on your answers to (A) and (B) above, tell what happens to the value of the BRL against the dollar (appreciates, depreciates, unchanged, undetermined. EXPLAIN the results in terms of the model. 1-3 sentences

Explanation / Answer

In this problem, it has been stated that inflation rate in brazil has increased. So domestic proucts is available by paying more currency. It will induce them to import goods from other countries like USA. On the other hand, export in USA will decrease. Due to the increase in export, less products will be available in USA for consumption. So demand will be more than supply. In consequence, price in USA will rise.

Answer: Inflation.

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As more goods are imported from USA, payments will be made in dollar. So brazilian importer will require morer Lira to buy dollar. Thus demand of Lira will increase.

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As more Lira are required to buy dollar, in international market, dollar will be bought by paying lira. So supply of Lira will increase. On the other hand due to fall in export, less lira will be demanded to make payment. Result will be fall in the value of Lira. So Lira will depreciate in value against dollar.

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