Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S....

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Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S. Federal Reserve for aggressively buying bonds and driving the exchange rate of the dollar down. This will hurt Brazil and other developing-country exporters, Mantega says, and what’s more, it’s meant to.   	How does the purchase of bonds by the Fed lower the exchange rate of the dollar? Explain. 	What can the Central Bank of Brazil do to prevent the Brazilian currency from appreciating relative to the dollar? Explain. 	What will be the effect of this action of the Brazilian Central Bank on the Brazilian economy? 
	
Document Preview: EC 102Fall 2012Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S. Federal Reserve for aggressively buying bonds and driving the exchange rate of the dollar down. This will hurt Brazil and other developing-country exporters, Mantega says, and what’s more, it’s meant to. How does the purchase of bonds by the Fed lower the exchange rate of the dollar? Explain.What can the Central Bank of Brazil do to prevent the Brazilian currency from appreciating relative to the dollar? Explain.  What will be the effect of this action of the Brazilian Central Bank on the Brazilian economy?

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EC 102
Fall 2012
Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S. Federal Reserve for aggressively buying bonds and driving the exchange rate of the dollar down. This will hurt Brazil and other developing-country exporters, Mantega says, and what’s more, it’s meant to. 
1. How does the purchase of bonds by the Fed lower the exchange rate of the dollar? Explain.
The purchase of bonds by the Fed increases the money supply and injects more $ into the US economy. The increase in $ supply reduces the $ price against other currencies and the exchange rate of the dollar falls. The same is happening for the Brazilian currency. The fall in exchange rate has negatively affected Brazilian exports and led to fears of a ‘currency war’. The most recent QE3 exercise that lets in more money supply in US economy,

Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S. Federal Reserve for aggressively buying bonds and driving the exchange rate of the dollar down. This...

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