Assume that United States residents invest heavily in the Brazilian government and stocks. In addition, Brazilian residents invest heavily in the United States. Because your firm imports goods from Brazil, you are assigned to forecast the value of BRL (the Brazilian real) against the USD – i.e., you forecast S:(BRLUSD). Explain how each of the following conditions will affect the value of the BRL against the USD, holding all other things equal. (Please plot a figure to explain each condition. No figures, no points.)
Questions:
a. “The surge in commodity prices and a weaker currency compared with pre-crisis levels has fed into headline inflation and inflation expectations.†The Brazilian inflation has increased substantially, while inflation in the U.S. remains stable.
b. “…leading the Central Bank to initiate a tightening cycle.†The Brazilian nominal interest rates may increase substantially, while the U.S. interest rates remain stable.
C. “GDP regained its pre-pandemic level in 2021 Q1 and momentum continues to be favorable.†The income level in Brazil may increase substantially, while the income level in the U.S. has remained unchanged.
d. “booming terms of trade.†The U.S. consumers buy more imported goods from Brazil.
e. “Uncertainty around the outlook is exceptionally high.†The political and policy uncertainty in Brazil is high and maybe going to get worse. You also assume that Brazil is not a safe haven.
