Brazilian Stagflation

Specific problem – How to address Brazil’s Stagflation: High inflation rates, high unemployment rate,
Negative GDP growth

Key Terms:

- Decreasing value of Brazilian Real – causing spike in import costs; increased cost and increasing
consumer prices
- Budget deficit was increasing (government is spending/ expenses is increasing more than its
earning/ revenue)
- International investors who lent money worried that interest rates will go lower
- Lower interest rates can also increase inflation (already high); however increasing interest rates
would lower GDP rates, which were already low and likely to plunge economy into recession
- Possible solution decrease cost of doing business by cutting red tap and pass cost reduction to
consumer hence reducing inflation
- Interest rate increasing at same rate of inflation
- Money value/price has inverse relationship to inflation – when inflation rise, value of money falls
- Foreign exchange affects money supply and ultimately inflation
- Public debt – how much a country owes to foreign lenders (i.e sovereign debt)

Analysis

Increase the Ease of doing business and lessen time required to start new business = lowest Brazil 116,
3.8% of GNI, time required to start business 83 days (compare to mean) – more businesses increases
supply of goods which decreases inflation (assuming demand is constant), also addresses unemployment

Increase supply of goods (Quantity) by increasing business production– gov’t provide tax incentives, tax
breaks, subsidies, etc. to businesses to increase real GDP growth – address high inflation by increasing
supply, and lessen unemployment rate

Decrease money supply can decrease inflation (inverse relationship with money price),

- Means less money in consumers pockets – less willing to spend, less reasons to buy things
- Increase interest rates to decrease money supply = effectively encourage people to place their
money in deposits, or investments (higher interest rates). Higher interest rates also lower
inflation because cost of borrowing of businesses becomes more expensive (less expansion)
- Decrease in money supply increases money’s value/ price (can buy more goods with one real)
- also increases appreciation of foreign exchange rate (supply and demand) (inverse relationship
with money supply)

Decrease in money supply causes appreciation in foreign exchange rate currency – lessens import costs
- Brazilians will buy more imports, and exports will decrease – solution, tax imports? – promotes
buying domestic products? Or incentivize exports buy taxing exporting goods less (keep trade
balance)
-
- Appreciating foreign exchange rate can also cause the following: more intense price competition
from foreign imports within the Brazilian market, and more intense competition with foreign
producers within the foreign markets

Reduce Public debt = 73% of GDP

- Lessen borrowing from foreign investors and lessen dependency on foreign capital by growing
economy domestically and improving tax collection

Address budget deficit by improving tax system and tax collection once economy normalizes.
Increase in business = increase no and amount gov’t can tax and collect from