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DEFENDING THE BRAZILIAN REAL

1. Brazil was facing hyperinflation i.e. supply of money was way beyond the demand for the money. Therefore Cardoso designed a real plan to drive out inflation form Brazil. His plan was based on the pegged exchange system. Under this system a country will peg the value of its currency to that of a major currency. The value of the real was pegged to that of the U.S. dollar and allowed to depreciate against the dollar by no more than 7.5% per year. To keep depreciation under control Brazil raised the interest rates repeatedly to maintain the value of the real against the dollar. The high cost of credit helped reduce the expansion of the money supply and brought inflation under control.
2. Following steps were taken by the Brazilian government to defend the peg of the real against the U.S. dollar.
„³The Brazilian central bank began to purchase reals in the open mark...

Posted by: Jack Drewes

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